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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999 Commission file number 333-43619.
UNITED DEFENSE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 52-2059782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CO-REGISTRANTS AND GUARANTORS
IRON HORSE INVESTORS, L.L.C. DELAWARE 52-2059783
UDLP HOLDINGS CORP. DELAWARE 52-2059780
UNITED DEFENSE, L.P. DELAWARE 54-1693796
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1525 Wilson Boulevard, Suite 700,
Arlington, Virginia, 22209-2411
(703)312-6100
(Address and telephone number of principal executive offices of
Registrant and each Co-Registrant)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. None as of March 1, 2000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. Common Stock outstanding as of
March 1, 2000.
No. of shares Par Value
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United Defense Industries, Inc. .............. 18,042,524 $0.01
Iron Horse Investors, L.L.C. ................. -NONE-
UDLP Holdings Corp. .......................... 1,000 $0.01
United Defense, L.P. ......................... -NONE-
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Forward-Looking Statements
This report on Form 10-K contains forward-looking statements that are based
on management's expectations, estimates, projections and assumptions. Words such
as "expects," "anticipates," "plans," "believes," "estimates," variations of
these words, and similar expressions are intended to identify forward-looking
statements which include but are not limited to projections of revenues,
earnings, performance, cash flows and contract awards. Forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties which are
difficult to predict. Therefore, actual future results and trends may differ
materially from those made in or suggested by any forward-looking statements due
to a variety of factors, including: the ability of United Defense Industries,
Inc. (the "Company") to design and implement key technological improvements
(such as, in the Crusader program discussed herein) and to execute its internal
performance plans; performance issues with key suppliers and subcontractors;
developments with respect to contingencies such as legal proceedings and
environmental matters; labor negotiations; changing priorities or reductions in
the U.S. government defense budget including developments in the U.S. Army's
Medium Force Brigade initiative; the performance of, and political and other
risks associated with, the Company's international operations and joint
ventures; and termination of government contracts due to unilateral government
action. For additional information, see "Risk Factors" in the Company's
Registration Statement on Form S-4, SEC File Number 333-43619.
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ITEM 1. Description of Business
Overview
The Company is a subsidiary of Iron Horse Investors, L.L.C. ("Iron Horse"),
organized under the laws of the state of Delaware in 1997 for the primary
purpose of facilitating the acquisition of United Defense, L. P. ("UDLP") by
Iron Horse. Iron Horse is owned by an investment group led by the Carlyle Group
("Carlyle"). On October 6, 1997, the Company acquired 100% of the partnership
interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation
("Harsco"), (collectively the "Sellers"). The Company is the only asset of Iron
Horse; therefore, except as indicated, the discussion herein is the same for
both entities.
The Company is a supplier of tracked, armored combat vehicles and weapons
delivery systems to the U.S. Department of Defense and a number of allied
military forces worldwide. The Company's primary initiatives include production
of the Bradley Fighting Vehicle ("BFV") and its derivatives, and development for
the Crusader Field Artillery System. These two key programs comprise over 40% of
the Company's annual revenues. The BFV is the leading domestically produced
vehicle able to fulfill the dual role of troop transport and armored fighting
vehicle. The Company has maintained its prime contractor position on the Bradley
program since production began in 1981, and has added a number of technology-
based upgrades and derivative vehicles that continue to extend the program's
life cycle. Building on over twenty years of experience on the M109 self-
propelled howitzer and upgrades, the Company is also the prime contractor for
the development of the Crusader Field Artillery System. The U.S. Army has
identified the Crusader as its planned multi-billion dollar next-generation
field artillery system, but the nature and scale of the Crusader program could
be impacted by the U.S. Army's Medium Force Brigade initiative as described in
Item 7. In addition to managing the fighting vehicle and howitzer programs, the
Company serves as the prime contractor for a number of mission critical military
programs, several of which have spanned decades, including the M88 tank recovery
vehicle since 1960, the M113 armored personnel carrier since 1960, and the U.S.
Navy's Mk45 naval gun system since 1968. The Company's major programs are
summarized below, in major customer groups: Tracked Combat Vehicles (land
vehicles for the U.S. Army, allied customers, and the U.S. Marine Corps), Naval
Systems (fleet programs for the U. S. Navy) and International Operations.
Tracked Combat Vehicles ("TCVs"). TCVs are highly mobile vehicles that can cross
natural and man-made obstacles and urban terrain in all weather conditions,
while under fire from enemy combat forces. The U.S. Army and Marines use tracked
combat vehicles for four basic missions: (i) close combat, where the combination
of tanks, scout vehicles, fighting vehicles, armored personnel carriers, and
command and control vehicles provide the capability to present an integrated and
flexible combat front to face enemy forces at close range; (ii) fire support, by
providing lethal indirect firepower through self-propelled armament and multiple
launch rocket systems; (iii) combat support, including the provision of
operational assistance, such as crossing barriers, clearing or laying obstacles
and
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recovering disabled systems; and (iv) amphibious assaults, in which amphibious
assault vehicles are able to initiate attack from the sea and continue the
attack on land. During 1999, 1998, and 1997, the Company derived approximately
81%, 84%, and 81% of its revenues, respectively, from TCVs.
The Bradley Fighting Vehicle. The Company has been the sole-source, prime
contractor of the BFV to the U.S. Army since its initial production in 1981. The
BFV is a tracked armored vehicle with a 25mm cannon, TOW missiles and a
stabilized turret, and is the leading domestically produced vehicle able to
fulfill the dual role of troop transport and armored fighting vehicle. The BFV
is outfitted with armor and day/night sights, and can transport up to nine
people across rough terrain. The vehicle's combination of lethality,
survivability, and mobility has established it as a critical component of the
U.S. government's full-spectrum warfare strategy. A total of 6,742 BFVs have
been built, of which 400 were for the Saudi Arabian Army.
Although new BFVs are no longer being built, the Company derives
significant revenue from upgrading the Army's existing fleet of BFVs to the BFV
A2 version. The Company initiated delivery of a further upgrade, the BFV A3
version, in October of 1998 as part of a low rate initial production contract
awarded in July of 1997. The BFV A3 provides enhancements such as situation
awareness capability, lethality, survivability and sustainability and is a key
component to the U.S. Army's program to digitize the battlefield. The U.S. Army
is currently planning to upgrade 1,109 older version BFVs to the A3
configuration by 2005, with annual funding allocations. The first of these
upgrade contracts was awarded to the Company in December 1998 for 70 vehicles
with delivery starting in March 2000. The Company is preparing a proposal for
the follow-on award, the FY00 quantity of 80 vehicles, and expects to be under
contract by June 2000.
BFV Derivatives and Support. The BFV has served as a platform for a number
of derivative vehicles developed by the Company. One such derivative, the
Multiple Launch Rocket System ("MLRS") carrier, was developed to provide a
carrier for a long-range rocket artillery system and is outfitted with rockets,
a launcher and fire control system developed and produced by Lockheed Martin
Vought Systems. The Company was awarded a contract to initiate an MLRS
remanufacture program, with the first delivery completed in August 1997. Another
derivative, the Fire Support Vehicle, supports armor and mechanized forces by
pinpointing enemy targets using laser technology, which allows more accurate and
timely calls for fire from the artillery. The Company provided 22 kits to
convert BFVs under a workshare arrangement with Red River Army depot to produce
Fire Support Vehicles. Another such vehicle is the Command and Control Vehicle
("C2V"). The C2V is a self-contained vehicle that keeps pace with armored
maneuver forces while providing the crew with a protected environment. The
Company was awarded the third year production contract for C2V conversions in
December 1998 with scheduled deliveries to be completed in May 2001. However,
the Army's Program Budget Decision #745, released in late 1999, removed
additional production funding for the C2V in FY01 and beyond and it is unclear
whether the FY00 extension will be awarded. Finally, the Army's Linebacker air
defense vehicle integrates the BFV with Stinger missiles and adds improvements
to turret fire
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control, target acquisition subsystems and survivability. The Company received a
new contract for Linebacker conversions in July 1998 and completed delivery in
1999.
In addition to the development and manufacture of BFV derivatives, the
Company provides BFV upgrade kits and field services. Kits allow for the upgrade
of BFVs to incorporate advancements in technology. The Company also deploys
experts to provide on-site training and advice to customers, complete
maintenance and repairs, and assess the necessity of replacement parts. The
Company is also under contract with the U.S. Army's Simulation, Training and
Instrumentation Command for the development and demonstration of a multi-purpose
simulator/trainer for the BFV family of vehicles.
Crusader. The Crusader is an integrated and automated two-vehicle artillery
system consisting of a 155-mm, self-propelled howitzer and a resupply vehicle.
The Company is the sole-source, prime contractor and systems integrator
responsible for the design and development of the Crusader, including delivery
of a prototype system, under a $1.1 billion Product Development Risk Reduction
contract, which is scheduled to be completed in 2003. The follow on development
phase, known as Engineering and Manufacturing Development ("EMD"), is scheduled
to begin in 2002, with delivery of the first EMD prototype in 2004. Activity on
the first Low Rate Initial Production ("LRIP") system is scheduled to begin in
Elgin, Oklahoma in 2006, which is three years later than previously planned,
reflecting the Army's latest funding schedule. The revised Army plan calls for
fielding 480 Crusader systems to its III Corps as opposed to the earlier
projected procurement of 1,138 systems.
The Crusader is designed to achieve the U.S. Army's stated objectives for
the next-generation howitzer. These specifications include: (i) increased
mobility, (ii) increased lethality, (iii) improved survivability, (iv) better
sustainability, and (v) increased strategic deployability. The Crusader is being
designed to be the first howitzer capable of keeping pace with the mechanized
maneuver force, and will be a key part of the Army's new, more rapidly
deployable force. The Crusader is also being designed to provide substantially
greater responsiveness and high rates of fire through long-range and accurate
firings enabled by the vehicle's advanced autoloading technology and actively-
cooled cannon, thereby giving it a multiple round simultaneous impact
capability. This firing capability is being designed to allow commanders to
extend and dominate the battle space and set a higher tempo for land operations.
The Crusader is being developed with an embedded digitized command, control,
communications and intelligence system for enhanced situational awareness, and
for new capabilities for battlefield movement and resupply.
M109 Self-Propelled Howitzer ("M109"). The M109 has been the most widely
used field artillery vehicle for the U.S. military and certain foreign
governments since it was first produced by the Company in 1974. The M109 is
recognized for its ability to deliver rapid and high volume artillery support
and to maximize survivability through mobility. The latest generation of the
M109, the M109A6 Paladin, is the most advanced M109 upgrade fielded to date.
FY00 funding will allow procurement of 6-8 Paladins. The Company also designs
and produces unique configurations of the M109 and offers M109 upgrade kits,
servicing and training to various foreign governments.
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M992 Field Artillery Ammunition Supply Vehicle ("FAASV"). The single
mission of the FAASV, the battlefield partner of the M109, is to safely
transport personnel, ammunition, and supplies to howitzer artillery vehicles on
the battlefield during both firing and non-firing conditions. By utilizing
synchronized and semi-automated resupply strategies and mechanisms to carry the
M109 ammunition, the FAASV enables the howitzer to remain in the field longer
and thereby increase its lethality. The heavily armored chassis provides
ballistic protection to its munitions supply crew and accommodates all standard
155mm rounds. In 1999, the Company completed a production contract for 96 new
vehicles and 36 converted vehicles. The Company was awarded an option to deliver
6 additional converted FAASVs in 2000.
M88 Armored Recovery Vehicle ("M88"). The M88 currently has an installed
base of more than 3,325 vehicles throughout the world. The M88 performs towing,
lifting and pulling tasks in the recovery of impaired tanks or in basic tracked
vehicle maintenance. In preparation for the deployment of heavier M1 tanks by
the U.S. Army, in 1986 the Company began the development effort for the M88A2
("HERCULES") upgrade. The HERCULES is the least expensive recovery vehicle
worldwide that can safely recover 70-ton tanks (for example, the M1A1/A2). The
U.S. Army has been awarding annual contracts for M88 upgrades over the past
several years and the Company is currently under contract to deliver vehicles
through January 2001.
M113 Armored Personnel Carrier ("M113"). The M113 has been the main troop
transport vehicle used by the U.S. military and allied governments throughout
the world, with more than 80,000 units delivered since initial production in
1960. The Company has produced several M113 models in cooperation with U.S.
allies, including various configurations of the Armored Infantry Fighting
Vehicle, historically produced in Europe and currently produced by the Company's
Turkish affiliate, FNSS. The U.S. Army, which received its last delivery of new
M113s from the Company in 1992, continues to upgrade its M113s to the latest A3
configuration. This upgrade work currently occurs in the Company's Anniston,
Alabama facility and continues to be a source of revenue for the Company. The
upgrade work is performed in a partnering arrangement with the Anniston Army
Depot. In addition, the Company is supplying kits for the Canadian Army to
upgrade their M113A2 vehicles to the latest M113A3 configuration and the new
improved Mobile Tactical Vehicle Light ("MTVL"). The MTVL variant, which is a
patented UDLP M113 derivative, has significantly more cross-country mobility,
payload capacity and under armor volume than the standard M113A3. The Company
will be offering the MTVL as the foundation for the U.S. Army's Medium Force
Brigade initiative.
M8 Armored Gun System ("M8"). The M8 was designed to meet the Army's need
for a rapidly deployable, multi-purpose tracked weapon system to support and
protect light infantry forces in conflict and peacekeeping missions worldwide.
It carries a rapid-fire, 105mm cannon and can be dropped by parachute from the
U.S. Air Force's C-130 Hercules and larger aircraft. It has armor that makes it
survivable against heavy machine guns and medium automatic cannons, and is
designed for lethality against tanks, fortifications, and enemy troops. The M8
was developed by the Company under a U.S. Army contract but did not go into
volume production, as the program was cancelled in
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1997 due to Army budgetary constraints. The Company has not to date achieved a
production sale of the M8. However, the Company believes that the M8 would
satisfy an important portion of the Army's emerging requirement for the Medium
Force Brigade, and the Company accordingly is continuing its efforts to market
the M8.
M9 Armored Combat Earthmover ("M9 ACE"). The M9 ACE is an 18-ton, fully
tracked, aluminum armored vehicle, used on the battlefield to bulldoze, rough
grade, excavate, haul and scrape. With a crew of one, the multi-purpose M9 ACE
can attain road speeds of up to 35 miles per hour, and unlike a standard
bulldozer, requires no transport vehicle. The M9 ACE can serve as the prime
mover of vehicles weighing up to 39,000 pounds and can clear debris left in the
wake of battles or civil disasters. The Company completed production of 52
vehicles in November 1999. Those vehicles are currently being fielded to
Engineer Units at Ft. Hood, Texas.
In-Stride Breacher ("Grizzly"). The Grizzly is a 70-ton vehicle currently
under development designed to clear mines and other complex obstacles. Mounted
on a modified M1 chassis, the Grizzly features a mine-clearing blade outfitted
with complex software that provides automatic depth control. It is also equipped
with a power-driven arm for digging, grappling and lifting, as well as external
cameras for vision and remote operation, with full electronic integration.
Currently nearing completion of the Engineering and Manufacturing Development
phase, the program's Low Rate Initial Production (LRIP) funds were cancelled by
the Office of the Secretary of Defense (OSD) in December 1999. This action was
taken by OSD solely due to not having sufficient funds to support the Army's
Medium Force Brigade initiative. The 3 Heavy Armor Divisions that remain still
require the in-stride, complex obstacle breaching capabilities that the Company
believes can only be accomplished by Grizzly. As a result of this requirement,
the Company is hopeful that production funds for the Grizzly will be restored at
a later date.
AAV7A1 Amphibious Assault Vehicle ("AAV"). The AAV has been the U.S. Marine
Corps' amphibious assault vehicle for over two decades with more than 1,500
vehicles delivered. In July 1998, the Company was awarded a $158 million four
year contract by the U.S. Marine Corps to rebuild the existing fleet of AAVs in
a partnering arrangement with the Albany, Georgia and Barstow, California Marine
Corps Logistic Bases. The Company currently produces different kit
configurations of the AAV for foreign customers such as Korea, Spain and Italy,
and then assists these countries in assembling the kits locally.
Naval Systems. The U.S. Navy plans for additional missile launcher firepower in
its surface combatant ship building program for the 21st century ("DD 21"). In
addition, the U.S. Navy plans to bolster surface land attack capability with
modifications to existing ships. The U.S. Navy's focus on land attack warfare is
spurring the development of new and modified weapon systems, including (i) a
modified naval gun system, the Mk45 Mod4; (ii) a new 155mm gun system; (iii)
land attack missile integration into the Vertical Launch System, requiring new
cannisters; and (iv) new or modified launching systems. The Company expects that
the design, engineering and production of these systems will be the primary
focus of naval ordnance manufacturers for the foreseeable future. The Company is
currently the sole source producer of the Mk45 gun and sole-source developer of
the 155mm
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advanced gun system (AGS). In addition, the Company has a work split arrangement
with Lockheed Martin to produce vertical missile launchers. During 1999, 1998
and 1997, the Company derived approximately 19%, 16%, and 19% of its revenues,
respectively, from Naval Systems.
Mk45 Naval Gun System ("Mk45"). The Mk45 is the U.S. Navy's sole 5-inch gun
system, with more than 150 systems installed. For the Navy's newest class of
destroyers, the Arleigh Burke DDG 51 class ("DDG51"), one 5-inch gun is being
installed on each ship built. In February 2000, the Company expects to complete
negotiations on FY 98, 99 and 00 DDG-51 requirements. The U.S. Navy currently
plans to continue building DDG-51 class ships through FY05. Furthermore, the
U.S. government supports foreign allied navies having compatible armaments, and
has recently increased its assistance to the Company's efforts to place Mk45s on
foreign ships. Management believes the improvements included in the Mod4
configuration which provide significantly greater range will make the Mk45 more
competitive internationally. In December 1999, the Company made its first
international sales of Mk45 Mod4 to Korea. The Company is also the lead agent
for the gun weapons systems integration for the Naval Surface Fire Support
program, with responsibility for the development and integration of a new naval
gun system, which includes managing the interfaces of other components with the
gun weapons system. The Company also anticipates a sole-source, prime
development contract to upgrade Mk45 guns on older Navy ships from Mod2 to Mod4
configuration, which extends the Mk45's range and improves surface fire support
capability.
Mk41 Vertical Launching System ("VLS"). The VLS is the U.S. Navy's primary
missile launcher on surface combatants, firing the anti-air Standard Missile,
strike mission-related Tomahawk cruise missile, anti-submarine VLASROC, and ship
self-defense Sea Sparrow missile. The VLS is manufactured under a work split
agreement with Lockheed Martin Corporation, which is the prime contractor of the
VLS launcher. The Company is the designated mechanical subcontractor and,
separately from the work split agreement, is the sole-source, prime provider of
VLS cannisters, which hold a variety of missiles. The U.S. Navy places the VLS,
like the Mk45, on all DDG 51s, each of which contains twelve 8-cell VLS modules.
In 1998 the Company entered into a five-year contract with Lockheed Martin
Corporation which provides for VLS production and ancillary work for the Company
from 1998 through 2002. The Company is currently negotiating two additional
option years that will provide production and ancillary work through 2004.
Advanced Gun System ("AGS"). The U.S. Navy is currently developing its
next-generation destroyer, DD21, with land attack as its primary mission. The
Company is the sole-source developer of AGS, the primary gun weapon system on
DD21, providing AGS to each of the two industry teams competing for development
of the ship. Each of the 32 planned DD21's will have two AGS on board, providing
the equivalent firepower of two battalions of Army M198 howitzers, at ranges of
up to 100 nautical miles. Funded gun development was initiated in 1999, with
completion of development scheduled for 2006. In addition to designing the gun
itself, the Company is expected to have significant responsibility for
developing the associated family of guided and ballistic ammunition.
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Revenues from this ammunition and associated propelling charges could approach
or exceed those for the gun itself through 2010 and beyond.
Overhaul, Repair, Maintenance and Other. The Company also provides
aftermarket service for the Mk45 and smaller caliber gun mounts, guided missile
launching systems, vertical launching systems, surface vessel torpedo tubes, gun
fire control systems, target and decoy launchers and other naval Combat Systems
equipment. Work is performed for the U.S. Navy and various international allied
forces. These services include engineering, repair, upgrade, maintenance,
logistic support, replacement parts and onboard technical assistance. A
significant amount of the service work is performed at the Company's Louisville
operation which is located at the facilities of the former U.S. Navy operated
Naval Ordnance Station. Other strategic work sites include San Diego, CA;
Norfolk, VA; and Mayport, FL.
International Operations. The Company operates joint ventures and co-production
programs in countries throughout the world. Current operations include joint
ventures in Saudi Arabia and Turkey, in each of which the Company owns a 51%
interest, and a co-production program in South Korea.
The Company's objective in setting up a joint venture or co-production
program is to provide the host country with an indigenous production capability
that will utilize the Company's developed programs, adapted to local
requirements. The Company uses project financing, letters of credit and offsets
to structure programs that meet unique customer needs.
FMC-Arabia. The joint venture was formed in 1994 to pursue defense
contracts within the Kingdom of Saudi Arabia. The Company's 51% interest in the
joint venture is a beneficial interest, but record ownership has remained with
FMC for administrative convenience. The Company accounts for FMC-Arabia on an
equity basis, due to the Saudi partner's ability to assert supermajority rights
which limit the control of the Company. The initial contract was to provide
contractor logistics support (CLS) and training to the Royal Saudi Land Forces
Infantry Corps for Bradley Fighting Vehicles previously purchased from the
Company. This contract is scheduled to be complete in the second quarter of
2000. FMC-Arabia has submitted a proposal for follow-on work with substantially
the same scope as the existing contract. In early 1997, FMC-Arabia was awarded a
three-year contract to commence the modernization of 523 of Saudi Arabia's M113s
(from a fleet of approximately 1,700 vehicles) to an A3 configuration. Because
of overall budgeting constraints affecting the Saudi Arabian government, the
funding for both the M113 and CLS programs has been substantially reduced, with
the result that FMC-Arabia operated both programs at only a nominal level during
1999. Current funding will only support work in Saudi Arabia through March of
2000. The Company is continuing to work with the Saudi Arabian government and
the U.S. government in an effort to arrange increased and more stable funding
for the programs, but there can be no assurance as to when or whether such
funding will be provided.
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FNSS-Turkey. The FMC-Nurol Savunma Sanayii A.S. ("FNSS") joint venture was
formed in 1987 to pursue armored combat vehicle sales to the Turkish Army. Four
types of armored vehicles using a common chassis are included in the contract:
personnel carrier, fighting vehicle, TOW missile vehicle and mortar vehicle. The
initial production contract for 1,698 vehicles has been completed, and a follow-
on contract for 665 additional vehicles is being pursued. In 1998, FNSS signed
its first export contract with the United Arab Emirates (Abu Dhabi) to provide
133 vehicles comprised of a mix of forward observation vehicles, engineer squad
vehicles and recovery vehicles, with deliveries scheduled to occur throughout
the year 2000. FNSS is pursuing additional orders with UAE as well as other
export opportunities within its licensed territory, which includes much of the
Middle East and Southeast Asia.
The Company's investment in FNSS is carried at cost since there is
uncertainty regarding the Company's ability to control the repatriation of
earnings. Royalties are reported as revenues, while dividends are reported as
earnings from foreign affiliates. Dividends and royalties are paid and reported
in U.S. dollars.
South Korea. In 1994, the Company formalized a teaming agreement with
Samsung Aerospace to jointly produce AAV's for the South Korean Marine Corps,
under a five-year contract. A new contract was signed in 1999 for $125 million,
extending the coproduction through 2005.
Research and Development and Engineering Capabilities
Among the Department of Defense's ("DoD") procurement requirements is the
research and development of new technologies for application to weapon systems
and upgrades. The Company's ability to compete for defense contracts depends to
a large extent on the impact and innovation of its research and development
programs.
The Company's engineering capability has been a critical component of its
success. Extensive experience in simulation, systems integration, armor,
mobility, survivability and armaments, as well as its software development,
engineering and electronics capabilities have allowed the Company to stay at the
forefront of the development, manufacture and upgrade of its products.
The Company expended $16.7 million, $13.0 million, and $12.8 million on
research and development in 1997, 1998, and 1999 respectively, a substantial
portion of which was included in overhead allocable to both U.S. government and
foreign government contracts.
Government Contracts; Regulatory Matters
Management expects that, for the foreseeable future, approximately 90% of
the Company's sales will continue to result from contracts with the U.S.
government, either directly, through prime contractors, or pursuant to the U.S.
government's Foreign Military Sales program. The Company's U.S. government
business is performed under cost-plus contracts (cost-plus-fixed-fee, cost-plus-
incentive-fee, or cost-plus-award-fee) and under
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fixed-price contracts (firm fixed-price, fixed-price incentive, or fixed-price-
level-of-effort). Generally, the Company's engineering and development programs
are performed under cost-plus contracts, while the production contracts are
awarded on a fixed-price basis. Cost-plus and fixed-price contracts accounted
for approximately 53% and 47%, respectively of the Company's business in 1999.
The Company's U.S. government business is subject to unique procurement and
administrative rules based on both laws and regulations. These laws and rules
include compliance with socio-economic requirements, the distribution of costs
to contracts and non-reimbursement of certain costs such as lobbying expenses.
The Company's contract administration and cost accounting policy and practices
are subject to oversight by government inspectors, technical specialists and
auditors.
U.S. government contracts are, by their terms, subject to termination by
the U.S. government either for its convenience or default by the contractor. In
addition, U.S. government contracts are conditioned upon the continuing
availability of Congressional appropriations. Congress usually appropriates
funds for a given program on a September 30 fiscal year basis, even though
contract performance may take many years. Consequently, at the outset of a major
program, the contract is usually partially funded, and additional monies are
normally committed to the contract by the procuring agency only as
appropriations are made by Congress for future fiscal years.
As is common in the industry, the Company is subject to business risks,
including changes in governmental appropriations, national defense policies or
regulations, service modernization plans, and availability of funds. Any of
these factors could materially adversely affect the Company's business with the
U.S. government in the future.
Competition
Management believes that the Company will continue to be able to compete
successfully based upon the quality, technological advancement and cost
competitiveness of its products and services. With respect to certain products
and programs, the Company competes with one or more companies, several of which
are multinational firms with substantially greater resources and capital. The
Company from time to time faces competition from a number of competitors, both
domestic and foreign, and in the tracked, armored combat vehicle market, the
Company encounters General Dynamics Corporation most frequently. The Company's
ability to compete for defense contracts depends to a large extent on the impact
and innovation of its research and development programs, its capability as a
systems integrator, its willingness to partner with military depots, its ability
to offer best value to its government customers, and its readiness in
facilities, equipment and personnel to undertake the programs for which it
competes. Historically, the Company concentrated on TCVs because it believes
that TCVs provide better capability than wheeled combat vehicles. However, the
U. S. Army has recently shown a strong interest in shifting its combat vehicles
to a wheeled platform, which the Company does not currently offer.
<PAGE>
In some instances, programs are sole-sourced by the U.S. government to a
single supplier, and in other cases involve a prime contractor and multiple
suppliers. In cases where the Company is the sole-source provider, there may be
other suppliers who have the capability to compete for the programs involved,
but they can only enter or reenter the market if the U.S. government should
choose to reopen the particular program to competition. The Company's customers,
particularly the industrial facilities operated by DoD, often compete with the
Company for aftermarket business, such as upgrade work and various overhaul and
servicing work performed by the Company.
Major Customers
The Company's sales are predominantly derived from contracts with agencies
of the U.S. government. See Note 13 to the Consolidated Financial Statements,
included in Item 8.
Backlog
As of December 31, 1999, the Company's funded backlog was approximately
$1.4 billion compared with $1.4 billion at the end of 1998 as well. Funded
backlog does not include the awarded but unfunded portion of total contract
values. This backlog provides management with a useful tool to project sales and
plan its business on an on-going basis. A substantial majority of this backlog
is expected to be earned as revenues by the end of 2000.
Intellectual Property
Although the Company owns a number of patents and has filed applications
for additional patents, it does not believe that its operations depend upon its
patents. In addition, the Company's U.S. government contracts generally license
it to use patents owned by others. Similar provisions in the U.S. government
contracts awarded to other companies make it impossible for the Company to
prevent the use by other companies of its patents in most domestic work.
Additionally, the Company owns certain data rights in its products under certain
of its government contracts. The protection of data developed by the Company
from use by other government contractors is from time to time a source of
negotiation between the Company and the U.S. government, and the extent of the
Company's data rights in any particular product generally depends upon the
degree to which that product was developed by the Company, rather than with U.S.
government funds. The Company routinely enters into confidentiality and non-
disclosure agreements with its employees to protect its trade secrets.
Employees
At December 31, 1999, the Company had approximately 4,850 employees and
approximately 360 contract workers (excluding employees of the foreign joint
ventures). Approximately 1,160 of these employees at five locations are
represented by six unions, including the Glass, Molders, Pottery, Plastics and
Allied Workers (Anniston); the International Association of Machinists
(Louisville and San Jose); the United Automobile, Aerospace and Agricultural
Implement Workers (Minneapolis); the International Guards
<PAGE>
(Minneapolis); the International Brotherhood of Teamsters (San Jose); and the
United Steelworkers (York). The next bargaining unit contract scheduled for
negotiation is in York with the United Steelworkers. This contract is up for
renewal on May 1, 2000. The Company considers its relations with its employees
to be generally good, and has not experienced a work stoppage since 1986.
Sources and Availability of Raw Materials
The Company's manufacturing operations require raw materials, primarily
aluminum and steel, which are purchased in the open market and are normally
available from a number of suppliers. The Company also purchases a variety of
electronic and mechanical components for which the Company has multiple
commercial sources. The Company has not experienced any significant delays in
obtaining timely deliveries of essential raw materials.
Environmental Matters
The Company's operations are subject to federal, state and local laws and
regulations relating to, among other things, emissions to air, discharges to
water, the handling and disposal of hazardous and solid wastes and the cleanup
of hazardous substances ("Environmental Laws"). The Company continually
assesses its compliance status and believes that its operations currently are in
substantial compliance with Environmental Laws.
Operating and maintenance costs associated with environmental compliance
and prevention of contamination at the Company's facilities are a normal,
recurring part of operations, are not significant relative to total operating
costs or cash flows, and are generally allowable as contract costs under the
Company's contracts with the U.S. government ("Allowable Costs"). Such costs
have not been material in the past and, based on information presently available
to the Company and on U.S. government environmental policies relating to
Allowable Costs in effect at this time (all of which are subject to change), are
not expected to have a material adverse effect on the Company.
As with compliance costs, a significant portion of the Company's
expenditures for remediation at its facilities consists of Allowable Costs.
Management believes that it has sufficient reserves to cover any remediation
costs that may not be allowable costs under its U.S. government contracts and
does not expect that such costs will materially adversely affect the Company.
Based on historical experience, the Company expects that a significant
percentage of the total remediation and compliance costs associated with its
facilities will continue to be Allowable Costs. In addition, pursuant to the
terms of the acquisition agreement between Iron Horse and the Sellers, the
Sellers are required to reimburse the Company for 75% of certain non-allowable
remediation costs relating to operations prior to the acquisition.
<PAGE>
Items 2. Properties
The table below sets forth information with respect to the Company's
manufacturing facilities and properties. The Company believes that its
facilities are adequate for its operations.
Location Leased/Owned Square Footage
- -------- ------------ --------------
Albany, GA Gov't Owned 42,600
Arlington, VA Leased 22,512
Anniston, AL Leased 96,000
Anniston, AL Owned 267,000
Aiken, SC Leased 21,000
Aiken, SC Owned 189,000
Aberdeen, SD Owned 105,000
Aberdeen, SD Leased 30,000
Fayette County, PA Leased 179,700
Fridley, MN* Gov't Owned 1,712,240
Fridley, MN* Owned 326,023
Louisville, KY Leased 633,609
Orlando, FL Leased 16,300
Hollister, CA Leased 1,218 acres
Santa Clara, CA
1125 Coleman Leased 37,450
1205 Coleman Leased 124,940
1450 Coleman Leased 36,600
340 Brokaw Leased 4,400
328 Brokaw Leased 174,300
2830 De La Cruz Leased 86,785
2890 De La Cruz Leased 68,708
Triangle, VA Leased 6,000
York County, PA Owned 996,518
York County, PA Leased 10,000
*The U.S. government is currently attempting to divest its Fridley,
Minnesota facility that has historically been provided rent free to the Company
for production of systems and spares for the U.S. government. UDLP is
participating with the government in an effort to sell the combined facility.
The proposed divestiture requires any purchaser to make the facility available
for the performance of government contracts and subcontracts for a minimum of
five years.
<PAGE>
ITEM 3. Legal Proceedings
On August 27, 1998, Alliant Techsystems, Inc. ("Alliant"), a subcontractor
to the Company in connection with the M109A6 Paladin howitzer prime contract,
filed a lawsuit against the Company and its prior owners in Minnesota state
court, Alliant Techsystems, Inc. v. United Defense, L.P., FMC Corp., and Harsco
------------------------------------------------------------------------
Corp., Fourth Judicial District Court, Hennepin County, Minnesota. The lawsuit
- -----
arose out of a U.S. Army-directed termination for convenience in 1996 of certain
subcontract work under the program which, until the time of termination, had
been performed by Alliant and was thereafter replaced by a subcontract which the
Company awarded to another contractor, Sechan Electronics. Alliant sought
damages in an amount asserted to be in excess of $50,000, but not otherwise
quantified. In response to motions by the Company, the Minnesota District Court
(i) dismissed four of the five counts of Alliant's state court case on March 4,
1999, and (ii) dismissed the remaining portion of the case on February 15, 2000.
Management does not believe that any appeal by Alliant of the dismissals would
succeed, or that, even in the case of a successful appeal, Alliant's suit would
have a material adverse effect on the Company.
The Company is also a defendant in a so-called qui tam case filed jointly
under the U.S. Civil False Claims Act (the "FCA") by one present and one former
employee of the Company's Armament Systems Division ("ASD") in Fridley,
Minnesota. The FCA, among other things, permits private parties (called
"relators" under the FCA) to seek, on behalf of the U.S. Government, recovery of
amounts which under certain circumstances have been improperly claimed from the
Government by its contractors. Beyond recovery of the Government's actual
damages, the FCA also authorizes the recovery of multiple penalties, and
provides as well that the relators may personally receive 15-30% of any recovery
obtained. The case, U.S. ex rel. Seman v. United Defense, FMC Corp., and Harsco
-----------------------------------------------------------
Corp., was filed against the Company and its prior owners on July 23, 1997 in
- -----
the U.S. District Court for the District of Minnesota and primarily alleges that
the Company improperly obtained payment under various of ASD's government
contracts by supplying components which did not comply with applicable technical
specifications. Relators in this case do not quantify the alleged damages, but
seek the full range of treble damages, civil penalties, and attorney fees
available under the FCA.
Since qui tam cases assert rights on behalf of the U.S. Government, the
Department of Justice ("DoJ") has the statutory right to intervene in such cases
and essentially take control of such litigation. Historically, DoJ has chosen to
intervene in cases which appear to offer relatively better prospects of ultimate
recovery. DoJ investigated the Seman matter and declined to intervene. The
Company has filed an answer denying the material allegations in the Seman case.
Management does not believe the outcome of this case will have a material
adverse effect on the Company.
The Company is also subject to other claims and lawsuits arising in the
ordinary course of business. Management believes that the outcome of any such
proceedings to which the Company is party will not have a material adverse
effect on the Company.
<PAGE>
ITEM 4. Submission of Matters a Vote of Security Holders
None.
ITEM 5. Market for Registrant's Stock and Related Stockholder Matters
The Company's common stock is not publicly traded. As of March 1, 2000,
there were forty holders of record of the Company's common stock. No dividends
were paid in 1999. In addition, the Company's Senior Subordinated Notes include
provisions restricting its ability to pay dividends in the future. See Note 8 to
the Consolidated Financial Statements in Item 8 for further information.
<PAGE>
Item 6. Selected Financial Data (In thousands)
The selected financial data presented below are derived from the Company's
consolidated financial statements, audited by Ernst & Young and should be read
in conjunction with such audited statements and the notes that are included in
Item 8.
<TABLE>
<CAPTION>
(In thousands) Nine months || Three months
ended || ended
Year ended December 31, September 30, || December 31, Year ended December 31,
1995 1996 1997 || 1997 1998 1999
-------------------------------------------- || --------------------------------------------
(Predecessor) ||
<S> <C> <C> <C> || <C> <C> <C>
Net sales $ 967,553 $1,029,333 $ 913,925 || $ 342,627 $1,217,555 $1,213,526
||
Net income(loss) 107,665 98,170 68,893 || (36,259) (120,007) 1,541
||
Total assets 569,604 644,979 610,475 || 1,246,083 989,741 873,998
||
Long term debt || 647,800 490,343 326,757
</TABLE>
Note: As a result of the Acquisition and the related revaluation of assets, net
income and total assets for periods ended after September 30, 1997 are not
comparable to prior periods.
Information for Iron Horse is identical except its total assets were
$991,080 and $875,337 at December 31, 1998 and 1999, respectively and its net
income(loss) was ($116,462) and $1,477 for the years ended December 31, 1998 and
1999, respectively.
<PAGE>
ITEM 7. Management's Discussion and Analysis of the Results of Operations and
Financial Condition
The following discussion and analysis should be read in conjunction with
the financial statements and related notes and the other financial information,
included elsewhere in this report.
Introduction
In October 1997, the Company's direct parent, Iron Horse, was funded with
$173 million of equity capital from several partnerships controlled by The
Carlyle Group. The equity was invested in the Company. On October 6, 1997, the
Company acquired (the "Acquisition") directly or through its wholly owned
subsidiary, UDLP Holdings Corp., 100% of the partnership interests in UDLP for
$880.0 million from FMC and Harsco. This price was subsequently adjusted
downward by $16.1 million to reflect adjustment clauses in the Acquisition
Agreement.
United Defense Industries, Inc. is the only asset of Iron Horse. Accordingly,
Management's Discussion and Analysis of the Results of Operations and Financial
Condition is the same for both Iron Horse and United Defense Industries, Inc.
The Company's subsidiary guarantors, UDLP Holdings Corp. and UDLP, are directly
or indirectly wholly owned by the Company and both such subsidiary guarantors
have guaranteed the Company's 8 3/4% Senior Subordinated Notes on a full,
unconditional, and joint and several basis. Any non-guarantor subsidiaries have
assets, equity, income and cash flows on an individual and combined basis less
than 3% of related amounts of the Company. Accordingly, separate financial
statements of those subsidiaries are not considered material or provided herein.
Overview
Variability in Quarterly and Annual Performance. The Company's operating
performance frequently varies significantly from period to period, depending
upon the terms and schedules for the Company's contracts, export sales, and, in
particular, the award or expiration of one or more contracts and the timing of
manufacturing and delivery of products under such contracts. As a result,
period-to-period comparisons may show substantial increases and decreases
disproportionate to underlying business activity and results for any given
period should not be considered indicative of longer-term results.
<PAGE>
Medium Force Brigade. Beginning with a public announcement by the U.S.
Army's Chief of Staff in October 1999, the Army has embarked upon an initiative
to transform a significant portion, and perhaps as much as half, of its combat
forces to a lighter and more rapidly deployable form known as the "medium
force." The conceptual essence of the medium force appears to be that it would
be lighter and less-heavily armed and armored than the Army's existing so-called
heavy forces (which currently constitute approximately six out of the Army's
total of ten divisions), but more lethal and survivable than the Army's current
light forces (currently approximately four divisions). The medium force would
take the form of a series of so-called Brigade Combat Teams (BCT) each equipped
with 300-400 combat vehicles. The Army has indicated that such vehicles
(currently referred to as medium armored vehicles, or MAVs) must be
transportable on the C130 aircraft (DoD's smallest aircraft capable of
transporting vehicles on a so-called roll-on, roll-off basis), and the Army
leadership has also expressed a predisposition that the new BCT vehicles be
wheeled. For military combat vehicles, there are substantial manufacturing,
design and engineering differences between wheeled and tracked vehicles, and the
Company historically has not produced wheeled vehicles.
Beyond a token experimental or test force of perhaps 200 vehicles, the
extent to which the Army would ultimately purchase MAVs will depend upon such
factors as testing results, evaluation of competing vehicles within DoD, and the
availability of acquisition funds for such vehicles in light of competitive
budgetary pressures from other DoD programs as well as non-military funding
requirements. For example, a recent public estimate that the MAV price tag
could total $10 billion over approximately six years would mean that the
corresponding level of Army acquisition spending in recent years would need to
more than double.
To whatever extent the Army were to procure MAVs, the Company would likely
be affected in two ways. First, any purchase of MAVs from the Company would tend
to improve the Company's sales and profits; and conversely, purchases of MAVs
from the Company's competitors would tend to strengthen such competitors and
depress the Company's revenues and profits. Second, funds used by the Army to
purchase MAVs (whether from the Company or its competitors) may well be derived,
at least in part, by cutting back or cancelling other Army acquisition programs,
including programs involving the Company's other product lines. Indeed, in
January 2000 the press began to report widely that the Army intended to cancel
both the C2V and Grizzly programs and to restructure the Crusader program (all
three programs are described above under Item 1, Description of Business) in
order to free up funds for the procurement of MAVs.
The Company strongly believes that certain of its current products,
particularly the M8 and the MTVL (see Item 1, Description of Business, above),
would fulfill the Army's emerging requirements for MAVs with stronger
capability, earlier availability, and at lower cost than any comparable wheeled
vehicle. It remains uncertain, however, whether, when, or to what extent the
Army will actually procure MAVs, as well as what final technical and performance
requirements (which might or might not favor a wheeled rather than a tracked
vehicle, or vice versa) the Army might ultimately announce as governing any MAV
procurement. To whatever extent the Army were to procure MAVs,
<PAGE>
there can be no assurance that any portion(s) of such procurement would be from
the Company, and/or that Army programs for the Company's other products would
not be reduced in scale or cancelled in order to make funds available for the
procurement of MAVs.
Senior Subordinated Notes. The Company received authorization from its
bank-lending group in February 1999 to purchase up to $50 million of the Senior
Subordinated Notes, but has not attempted to acquire any of the notes yet. This
authorization was granted due to the Company's performance of making bank debt
prepayments in excess of scheduled amortization payments.
The Company will consider purchasing the Senior Subordinated Notes in the
open market if market conditions are appropriate and if excess cash is available
to make a purchase. However, the Company may decide to continue to apply any
excess cash balances towards the prepayment of bank debt as it has to date.
Results of Operations
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Revenue. Revenue for 1999 was $1,213.5 million, a slight decline of $4.0
million or 0.3%, from 1998. The lower revenue was largely due to the wind down
of the Paladin artillery upgrade program at the end of the second quarter of
1999 and the completion of the self-propelled howitzer and the M113 shipments to
foreign customers. This decline was offset by higher revenue from the shipments
of vertical launcher systems, increased billings for the Crusader program, and
new deliveries of M9 armored combat earth movers, self propelled howitzers and
rebuilt AAV7 amphibious vehicles.
Gross Profit. Gross profit increased $103.4 million, or 87.4%, to $221.6
million for 1999 from $118.3 million for 1998. The gross profit rate improved
8.6 percentage points to 18.3% for 1999. The improvement in 1999 was due to
lower costs related to assets revalued in connection with the Acquisition. In
1998 reserves were established including a sizeable non-cash pension charge for
restructuring the Company's Armament Systems Division, the write-off of
unusable, capitalized software and other impaired assets which did not recur in
1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $167.9 million in 1999, a decrease of $9.6 million,
or 5.4% from 1998. The marginal decrease in expenses is attributable to lower
depreciation and amortization of goodwill and other intangible assets related to
assets revalued in connection with the Acquisition.
Earnings from Foreign Affiliates. Earnings from foreign affiliates were $.5
million in 1999, a decline of $5.7 million from 1998. The decline was due to the
establishment of additional reserves for the potential offset penalty for the
joint venture in Turkey equivalent to dividends received from the venture in
1999.
<PAGE>
Interest Expense. Net interest expense including the amortization of
financing costs was $37.0 million for 1999 which was $13.7 million or 27.1%
lower than 1998. The decline in interest expense was the result of lower debt
levels in 1999.
Net Income. As a result of the foregoing, the Company earned net income of
$1.5 million for 1999 compared with a net loss of $120.0 million for 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenue. Revenue for 1998 was $1,217.6 million, a decline of $39.0 million
or 3.1%, from 1997. The lower revenue was due to reduced vehicle shipments to
foreign customers, lower deliveries of naval five-inch guns and of Paladin
artillery upgrades, and the shipment in 1997 of a large component for the
Seawolf submarine, which did not recur in 1998. This decline was partially
offset by higher revenue from the Crusader contract in 1998, the shipment of
ammunition supply vehicles, and higher engineering sales such as for development
contracts.
Gross Profit. Gross profit declined $59.2 million, or 33.4%, to $118.3
million for 1998 from $177.5 million for 1997. The gross profit rate
deteriorated 4.4 percentage points to 9.7% for 1998. The decline is a result of
a full year of amortization in 1998 related to assets revalued in the
Acquisition versus only one quarter of amortization in 1997, the establishment
of reserves including a sizeable non-cash pension charge for restructuring the
Company's Armament Systems Division, the write-off of unusable, capitalized
software and other impaired assets, and the lower revenue described above.
Reserves established for contracting issues and downward adjustments to contract
profit estimates in 1997 partially offset the decline.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $177.4 million in 1998, an increase of $51.1
million, or 40.4% from 1997. The increase in expenses is attributable to the
amortization of goodwill and other intangible assets established in conjunction
with the Acquisition. The higher costs were partially offset by lower expense
for corporate services, lower commissions to foreign representatives, and
savings related to the consolidation of certain staff functions.
Research and Development. Research and development costs were $13.0
million for 1998 which was $3.6 million, or 21.8%, below spending for 1997. The
reason for the decline is that costs in 1997 were higher than usual as the
culmination of several projects required heightened spending to insure that they
were completed in a timely fashion.
Earnings from Foreign Affiliates. Earnings from foreign affiliates were
$6.2 million in 1998, a decline of $7.7 million from 1997. The decline was due
to lower earnings derived from the Company's Saudi Arabian joint venture as a
result of lower funding available from the Saudi government and, as a
consequence, decreased activity on Saudi contracts.
<PAGE>
Interest Expense. Net interest expense including the amortization of
financing costs for 1998 was $50.8 million, which was $36.6 million higher than
for 1997. The Company began incurring interest expense in the fourth quarter of
1997 associated with debt that was obtained to finance the Acquisition.
Net Income. As a result of the foregoing, including the addition of
interest expense and amortization of assets revalued in connection with the
Acquisition discussed earlier, there was a net loss of $120.0 million in 1998
compared with net income of $32.6 million for 1997.
Liquidity, Capital Resources and Financial Condition
The Company's liquidity requirements depend on a number of factors relative
to the timing of production and deliveries under its U.S. government and direct
foreign sales ("DFS") contracts. The Company generally receives performance
based payments or progress payments on U.S. government contracts based either on
meeting performance milestones or on a percentage of contract expenditures, and
it generally negotiates for the payment of advances from customers on DFS
contracts. Advances on DFS contracts vary depending on the specific programs
involved. These payments reduce the need for Company financed working capital,
and changes in working capital between periods are frequently due to program
status changes and the level of such payments for the specific programs by
period.
Cash provided by operating activities. Cash provided by operating
activities for 1999, 1998 and 1997 was $189.6 million, $197.3 million and $194.8
million, respectively. During 1999 the majority of cash was generated from net
income plus depreciation and amortization of $137.4 million, and significant
collections of progress payments from U.S. Government and foreign advance
payments. In 1998 the Company likewise generated a high volume of cash resulting
from net income plus depreciation and amortization of $58.0 million, and
sizeable reductions in receivables and inventories as the U.S. government
payment office paid all billings received by a certain deadline, and the Company
aggresively reduced inventories consistent with shipping schedules. Cash flow
was also high in 1997 due to net income plus depreciation and amortization of
$98.6 million, plus significant reductions in inventory resulting from major
shipments to foreign customers in Thailand, Austria and Brazil and also of VLS
launchers.
Cash flow has essentially remained consistent in the last three years. Cash
provided by operating activities is anticipated to be considerably lower in 2000
than in recent years as the Company expects that it will need to increase
working capital in connection with the Company's anticipated workload under
current contracts. In recent years, the Company has been able to generate
substantial cash from reducing working capital.
Cash used in investing activities. Capital spending in 1999 was $25.2
million compared with $24.0 million in 1998 and $39.6 million in 1997. The
Company received $16.1 million in 1998 representing a downward purchase price
adjustment related to the
<PAGE>
Acquisition. 1997 includes a cash use of $838.9 million representing the payment
of the Acquisition purchase price net of cash on hand at the closing.
Financing activities. In 1998, the Company raised $6.1 million from the
sale of additional shares of its common stock to certain officers, directors and
other management members of the Company and to individuals affiliated with Iron
Horse. In 1997, the Company raised $707.0 million of debt and $173.0 million of
equity to finance the Acquisition and paid $28.7 million associated with the
Acquisition transaction costs. Cash used for financing activities included the
pay down of $157.1 million in debt for 1999, $152.8 million for 1998 and $47.2
million for 1997. Also, $114.4 million was distributed to FMC and Harsco in
1997.
Impact of The Year 2000 ("Y2K")
Each of the Company's divisions executed a Y2K program to identify, assess
and remediate Y2K problems. The approach was a five-phase strategy of
awareness, assessment, renovation, validation and implementation. Contingency
and business recovery plans were developed to address unexpected critical
systems failures.
The Company experienced no material Y2K-related impacts before, during or
after the millennium rollover.
In order to obviate Y2K problems, the Company spent $30.1 million repairing
or replacing existing business and information technology computing systems and
assets with embedded systems.
The Company will monitor systems during the first quarter of 2000 to ensure
continued systems operation and supply line deliveries.
<PAGE>
ITEM 7A. Market Risk
In October 1997, the Company entered into a three-year interest rate swap
agreement involving the exchange of floating rate interest payment obligations
for fixed rate interest payment obligations. The notional amount of this
interest rate swap agreement is $160 million. The Company entered into this
agreement as a hedge to manage interest costs and risks associated with
fluctuating interest rates. The agreement entitles the Company to pay a base
interest rate amount of 5.75%, in return for the right to receive a floating
interest rate which is based on the three-month LIBOR as of the quarterly
measurement date. In the event the three-month LIBOR at the measurement date
exceeds 6.99% the base interest rate is adjusted to the then effective LIBOR up
to a maximum rate of 9%. The net cash amounts paid or received on the agreement
are accrued and recognized as an adjustment to interest expense.
As of December 1999, the Company had debt totaling $350 million of which
$150 million were subject to variable interest rates.
<PAGE>
ITEM 8. Consolidated Financial Statements and Supplementary Data
The following consolidated financial statements of Iron Horse Investors,
L.L.C. and United Defense Industries, Inc. are provided in response to the
requirements of Item 8:
<TABLE>
<S> <C>
IRON HORSE INVESTORS, L.L.C. AND UDLP
Report of Independent Auditors.............................................. F1
Consolidated Balance Sheets as of December 31, 1998 and 1999................ F2
Consolidated Statements of Operations for the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the years ended December 31, 1998 and 1999...... F3
Consolidated Statements of Partners' Capital and Members' Capital
for the nine months ended September 30, 1997, the three months ended
December 31, 1997, and the years ended December 31, 1998 and 1999...... F4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997, the three months ended December 31, 1997,
and the years ended December 31, 1998 and 1999......................... F5
Notes to Consolidated Financial Statements.................................. F6- 22
UNITED DEFENSE INDUSTRIES, INC. and UDLP
Report of Independent Auditors.............................................. F23
Consolidated Balance Sheets as of December 31, 1998 and 1999................ F24
Consolidated Statements of Operations for the nine months ended
September 30, 1997, the three months ended
December 31, 1997, and the years ended December 31, 1998 and 1999...... F25
Consolidated Statements of Partners' Capital and Members' Capital
for the nine months ended September 30, 1997, the three months ended
December 31, 1997, and the years ended December 31, 1998 and 1999...... F26
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997, the three months ended December 31, 1997,
and the years ended December 31, 1998 and 1999......................... F27
Notes to Consolidated Financial Statements.................................. F28- 45
</TABLE>
<PAGE>
United Defense Industries, Inc. has no operations independent from its
subsidiaries. Its subsidiaries that are guarantors of the Senior Subordinated
Notes, UDLP Holdings Corp. and United Defense, L.P., are directly or indirectly
wholly-owned and both of those subsidiary guarantors have guaranteed the Senior
Subordinated Notes on a full, unconditional and joint and several basis. Any
non-guarantor subsidiaries have assets, equity, income and cash flows on an
individual combined basis less than 3% of related amounts of United Defense
Industries, Inc. Accordingly, separate audited financial statements of the
guarantor subsidiaries are not provided herein.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Iron Horse Investors, L.L.C.
We have audited the accompanying consolidated balance sheets of Iron Horse
Investors, L.L.C. and subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three months ended December 31, 1997 and the years ended December
31, 1998 and 1999. We have also audited the consolidated statements of
operations, partners' capital, and cash flows of United Defense, L.P.
(predecessor) and subsidiaries for the nine months ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Iron Horse
Investors, L.L.C. and subsidiaries at December 31, 1998 and 1999 and the
consolidated results of their operations and their cash flows for the three
months ended December 31, 1997 and the years ended December 31, 1998 and 1999,
and the consolidated results of operations and cash flows of United Defense,
L.P. and subsidiaries for the nine months ended September 30, 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
January 31, 2000
Washington D.C.
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Assets December 31, 1998 December 31, 1999
---------------------------------------
<S> <C> <C>
Current assets:
Cash and marketable securities $ 85,520 $ 94,325
Trade receivables 64,395 57,198
Inventories 254,343 254,750
Other current assets 4,255 4,056
---------------------------------------
Total current assets 408,513 410,329
Property, plant and equipment, net 122,721 84,693
Intangible assets, net 330,024 254,276
Prepaid pension and postretirement benefit cost 123,912 119,883
Other assets 5,910 6,156
---------------------------------------
Total assets $ 991,080 $ 875,337
=======================================
Liabilities and Capital
Current liabilities:
Current portion of long-term debt $ 16,643 $ 23,086
Accounts payable, trade and other 88,497 64,639
Advanced payments 258,395 303,065
Accrued and other liabilities 75,832 91,340
---------------------------------------
Total current liabilities 439,367 482,130
Long-term liabilities net of current portion:
Accrued pension and postretirement benefit cost 14,610 5,075
Long-term debt 490,343 326,757
Other liabilities 22,630 35,675
---------------------------------------
Total liabilities 966,950 849,637
Minority interest 3,851 3,944
Commitments and contingencies (Notes 8 & 9)
Members' capital 20,279 21,756
---------------------------------------
Total liabilities and members' capital $ 991,080 $ 875,337
=======================================
</TABLE>
See accompanying notes.
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
--------------------||------------------------------------------------------
<S> <C> || <C> <C> <C>
Revenue: ||
Sales $913,925 || $342,627 $1,217,555 $1,213,526
||
Costs and expenses: ||
Cost of sales 754,977 || 324,123 1,099,291 991,907
Selling, general and ||
administrative expenses 91,413 || 34,947 177,449 167,877
Research and development 12,096 || 4,558 13,021 12,782
--------------------||----------------------------------------------------
Total expenses 858,486 || 363,628 1,289,761 1,172,566
||
Earnings related to investments ||
in foreign affiliates 13,521 || 432 6,208 533
--------------------||----------------------------------------------------
Income(loss) from operations 68,960 || (20,569) (65,998) 41,493
||
Other income (expense): ||
Interest income 1,456 || - 1,396 1,820
Interest expense - || (15,622) (52,155) (38,835)
Miscellaneous, net - || (68) - -
--------------------||----------------------------------------------------
Total other income (expense) 1,456 || (15,690) (50,759) (37,015)
--------------------||-----------------------------------------------------
||
Income(loss) before income taxes ||
and minority interest 70,416 || (36,259) (116,757) 4,478
||
Provision for income taxes 1,523 || - 3,250 2,937
--------------------||----------------------------------------------------
Income (loss) before minority ||
interest 68,893 || (36,259) (120,007) 1,541
Minority Interest - || - 3,545 (64)
--------------------||----------------------------------------------------
Net income (loss) $ 68,893 || ($36,259) ($ 116,462) $ 1,477
==========================================================================
</TABLE>
See accompanying notes.
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of
Partners' Capital and Members' Capital
(In thousands)
<TABLE>
<CAPTION>
Partners' Members'
(Predecessor) Capital Capital Total
----------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 179,638 $ - $ 179,638
Distributions (114,409) - (114,409)
Liabilities transferred from FMC (3,120) - (3,120)
Net income for the nine months
ended September 30, 1997 68,893 - 68,893
----------------------------------------------
Balance, September 30, 1997 $ 131,002 $ - $ 131,002
==============================================
==============================================
Balance, October 1, 1997 $ - $ - $ -
Members' contributions - 173,000 173,000
Net loss for the three months
ended December 31, 1997 - (36,259) (36,259)
----------------------------------------------
Balance, December 31, 1997 - 136,741 136,741
Net loss for the year
ended December 31, 1998 - (116,462) (116,462)
----------------------------------------------
Balance, December 31, 1998 - 20,279 20,279
Net income for the year
ended December 31, 1999 - 1,477 1,477
----------------------------------------------
Balance, December 31, 1999 $ - $ 21,756 $ 21,756
==============================================
</TABLE>
See accompanying notes.
<PAGE>
Iron Horse Investors, L.L.C.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands)
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
--------------------||------------------------------------------------
<S> <C> || <C> <C> <C>
Operating activities ||
Net income (loss) $ 68,893 || ($ 36,259) ($116,462) $ 1,477
Adjustments to reconcile net income (loss) to cash ||
provided by operating activities: ||
Depreciation 19,331 || 20,660 83,153 55,528
Amortization 9,673 || 16,263 94,806 80,317
Minority interest - || - (3,545) 64
Other (4,039) || 9,001 5,291 1,123
Changes in assets and liabilities: ||
Trade receivables 7,600 || (13,335) 30,452 7,197
Inventories 15,546 || 92,875 76,030 (407)
Other assets (745) || (2,187) 1,636 474
Prepaid pension and postretirement benefit cost (8,783) || (2,736) 15,519 4,029
Accounts payable, trade and other (14,585) || 17,639 (5,144) (23,858)
Advanced payments 15,082 || (12,671) (3,006) 44,670
Accrued and other liabilities 11,626 || (16,717) 14,360 28,554
Accrued pension and postretirement benefit cost 3,181 || (475) 4,212 (9,535)
--------------||----------------------------------------------
Cash provided by operating activities 122,780 || 72,058 197,302 189,633
--------------||----------------------------------------------
||
Investing activities ||
Capital spending (23,722) || (15,893) (24,020) (25,246)
Disposal of property, plant and equipment 6,938 || 3,170 7,298 1,532
Short term investment with FMC Corporation 19,497 || - - -
Purchase of business (net of $11,107 cash acquired) - || (838,893) - -
Adjustment to purchase price of business - || - 16,074 -
----------------||----------------------------------------------
Cash provided by (used in) investing activities 2,713 || (851,616) (648) (23,714)
----------------||----------------------------------------------
||
Financing activities ||
Payments on long-term debt - || (47,200) (152,814) (157,143)
Payments for financing and transaction costs - || (28,726) - -
Proceeds from issuance of long-term debt - || 707,000 - -
Proceeds from sale of common stock by subsidiary - || 173,000 6,057 29
Partners' distributions (114,409) || - - -
----------------||----------------------------------------------
Cash (used in) provided by financing activities (114,409) || 804,074 (146,757) (157,114)
----------------||----------------------------------------------
||
Increase in cash and marketable securities 11,084 || 24,516 49,897 8,805
Cash and marketable securities, beginning of period 23 || 11,107 35,623 85,520
----------------||----------------------------------------------
Cash and marketable securities, end of period $ 11,107 || $ 35,623 $ 85,520 $ 94,325
================================================================
</TABLE>
See accompanying notes.
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements
1. Basis of Presentation
Iron Horse Investors, L.L.C. together with its subsidiaries, (the
"Company") was formed for the primary purpose of facilitating the acquisition of
United Defense, L.P. ("UDLP") via its investment in United Defense Industries,
Inc. ("UDI").
In October 1997, the Company was funded with $173 million of equity
capital, from an investment group led by the Carlyle Group ("Carlyle"), which
was invested in UDI. On October 6, 1997, UDI acquired 100% of the partnership
interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco")
(the "Sellers"). As a result of adjustments to the carrying value of assets and
liabilities pursuant to this transaction (see Note 3), the financial position
and results of operations for periods subsequent to the acquisition are not
comparable to UDLP amounts.
The Company through UDI designs, develops and manufactures various tracked
armored combat vehicles and a wide spectrum of weapons delivery systems for the
armed forces of the United States and nations around the world.
The financial statements include the accounts of the Company and its
subsidiaries. Prior to the acquisition, the financial statements include the
accounts of UDLP and its subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates of contract cost and revenues used
in the earnings recognition process. Actual results could differ from those
estimates.
Cash and Marketable Securities
Cash and marketable securities consist of investments with initial
maturities of three months or less.
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
provided principally on the sum-of-the-years digits and straight-line methods
over estimated useful lives of the assets (land improvements--twenty years;
buildings--twenty to thirty-five years; and machinery and equipment--two to
twelve years).
Maintenance and repairs are expensed as incurred. Expenditures that extend
the useful life of property, plant and equipment or increase its productivity
are capitalized and depreciated.
Long-lived Assets, Including Intangible Assets and Goodwill
The Company evaluates on a quarterly basis its long-lived assets to be held
and used, including certain identifiable intangible assets and goodwill, to
determine whether any events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company would use an estimate of the undiscounted value of expected future
operating cash flows to determine whether the asset is recoverable and measure
the amount of the impairment based on the difference between the carrying amount
of the asset and its estimated fair value.
Investments in Affiliated Companies
The Company's investment in a majority owned foreign joint venture in
Turkey is carried at cost since there is uncertainty regarding the ability to
control the venture or to repatriate earnings. Income is recognized as
dividends are received. Dividends received net of amounts accrued for taxes and
future obligations were $5.3 million for the nine months ended September 30,
1997, $0 for the three months ended December 31, 1997, and $4.6 million for the
year ended December 31, 1998. A provision of $1.1 million was recorded for the
year ended December 31, 1999.
The Company's investment in a foreign joint venture in Saudi Arabia is
accounted for by using the equity method. Equity in earnings from this
investment was $8.2 million for the nine months ended September 30, 1997, $0.4
million for the three months ended December 31, 1997, $1.6 million for the year
ended December 31, 1998, and $1.6 million for the year ended December 31, 1999.
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
Advanced Payments
Advanced payments by customers for deposits on orders not yet billed and
progress payments on contracts-in-progress are recorded as current liabilities.
Revenue and Profit Recognition for Contracts-in-Progress
The Company recognizes sales on most production contracts as deliveries are
made or accepted. Gross margin on sales is based on the estimated margin to be
realized over the life of the related contract. Sales under cost reimbursement
contracts for research, engineering, prototypes, repair and maintenance and
certain other contracts are recorded when funded, as costs are incurred and
include estimated fees in the proportion that costs incurred to date bear to
total estimated costs. Changes in estimates for sales and profits are recognized
in the period in which they are determinable using the cumulative catch-up
method. Claims are considered in the estimated contract performance at such time
as realization is probable. Any anticipated losses on contracts (i.e., cost of
sales exceeds sales) are charged to operations as soon as they are determinable.
Gross profit for the nine months ended September 30, 1997 includes
approximately $13.5 million of noncash charges for changes in estimated contract
profitability related to contractual issues with customers and other matters
resulting from the periodic reassessment of the estimated profitability of
contracts in progress.
Stock-Based Compensation
Provided the option price is not less than fair value of the common stock
at the date an option is granted, the Company records no compensation expense in
its consolidated statements of operations. See Note 10 for the pro forma effect
on operating results had the Company recorded compensation expense for the fair
value of stock options.
Income Taxes
As a limited partnership, income earned by UDLP passed to its partners and
was taxable at that level, except for taxes payable on the income of UDLP's
Foreign Sales Corporation ("FSC") subsidiary.
As a limited liability company, income which has not been taxed previously
is passed through to its members. The Company's corporate subsidiaries are
responsible for income taxes on earnings at that level, and accordingly the
Company's subsidiaries provide for income taxes at
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
the corporate level determined under the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws expected to be effective when these
differences reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. Business Purchase
On October 5, 1997, the Company via its direct investment in UDI, acquired
100% of the partnership interests of UDLP and certain other related business
assets of FMC. The purchase price including expenses was $864 million after an
adjustment of $16 million agreed to during 1998. The Company financed the
acquisition through a cash equity investment of $173 million and debt (see Note
8). The acquisition was accounted for using the purchase method of accounting.
4. Inventories
The majority of the Company's inventories are recorded at cost determined
on a LIFO basis. Inventory costs include manufacturing overhead.
The current replacement cost of LIFO inventories exceeded their recorded
values by approximately $5.2 million at December 31, 1998 and December 31, 1999.
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
------------------------------
<S> <C> <C>
Buildings $ 38,213 $ 39,978
Machinery and equipment 160,788 166,257
Land and improvements 7,802 8,126
Construction in progress 7,500 7,754
------------------------------
214,303 222,115
Less: accumulated depreciation (91,582) (137,422)
------------------------------
Net property, plant and equipment $122,721 $ 84,693
==============================
</TABLE>
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
6. Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
------------------------------
<S> <C> <C>
Software and other intangibles $ 75,200 $ 92,119
Firm business and ongoing programs 225,103 225,103
Goodwill 125,130 124,339
------------------------------
425,433 441,561
Less: accumulated amortization (95,409) (187,285)
------------------------------
Net intangible assets $330,024 $ 254,276
==============================
</TABLE>
The Company's software and other intangibles are being amortized over their
estimated useful lives on a straight-line basis over three to five years or
using other methods based on revenues of related contracts or programs. The
excess of purchase cost over the fair value of the net assets acquired
(goodwill) that resulted from the application of purchase accounting for the
acquisition of UDLP is being amortized over thirty years.
7. Pensions and Other Postretirement Benefits
Substantially all of the Company's domestic employees are covered by
retirement plans. Plans covering salaried employees provide pension benefits
based on years of service and compensation. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
Company's funding policy is to make contributions based on the projected unit
credit method and to limit contributions to amounts that are currently
deductible for tax purposes.
Substantially all of the Company's employees are also covered by
postretirement health care and life insurance benefit programs. Employees
generally become eligible to receive benefits under these plans after they
retire when they meet minimum retirement age and service requirements. The cost
of providing most of these benefits is shared with retirees. The Company has
reserved the right to change or eliminate these benefit plans.
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The change in benefit obligation and plan assets of the plans and prepaid
or accrued pension and postretirement costs recognized in the balance sheets at
December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1999 1998 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 348,199 $442,651 $ 52,992 $54,795
Service cost 11,751 13,747 1,382 1,489
Interest cost 27,017 27,982 3,515 3,420
Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594)
Actuarial (gain) loss 61,576 (38,130) 1,236 (4,923)
Plan amendments - 1,238 - -
Special termination benefits and
curtailments 16,397 - - -
-------------------------------------------------------------------------
Benefit obligation at end of year 442,651 422,314 54,795 49,187
Change in plan assets
Fair value of plan assets at beginning of
year 480,522 548,003 49,702 60,412
Assets transferred from Sellers 4,469 - - -
Actual return on plan assets 82,668 13,874 12,830 (6,558)
Employer contributions 2,633 1,066 2,210 3,568
Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594)
-------------------------------------------------------------------------
Fair value of plan assets at end of year 548,003 537,769 60,412 51,828
-------------------------------------------------------------------------
Funded status 105,352 115,455 5,617 2,641
Unrecognized actuarial (gain) loss 1,626 (6,012) (7,420) (1,514)
Unrecognized prior service cost 4,127 4,238 - -
-------------------------------------------------------------------------
Net amount recognized $ 111,105 $113,681 $ (1,803) $ 1,127
=========================================================================
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid pension and postretirement
benefit cost $ 123,912 $118,756 $ - $ 1,127
Accrued pension and postretirement
benefit cost (12,807) (5,075) (1,803) -
-------------------------------------------------------------------------
Net amount recognized $ 111,105 $113,681 $ (1,803) $ 1,127
=========================================================================
</TABLE>
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the assumptions used in the determination of net
pension and postretirement benefit costs and benefit obligations for the nine
months ended September 30, 1997, the three months ended December 31, 1997, and
the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Nine months Three months Year Year
ended ended ended Ended
September 30, December 31, December 31, December 31,
1997 1997 1998 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 8.00% 7.00% 6.50% 7.50%
Expected return on plan assets 9.62% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 4.00% 3.50% 5.00%
</TABLE>
The following tables show the components of the net periodic benefit cost (in
thousands):
<TABLE>
<CAPTION>
|| Pension Benefits
|| ----------------
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
------------------||--------------------------------------------------------
<S> <C> || <C> <C> <C>
Service cost $ 7,286 || $ 3,275 $ 11,751 $ 13,747
Interest cost 16,309 || 5,941 27,017 27,982
Expected return on plan assets (27,721) || (10,512) (43,080) (45,213)
Net amortization and recognized losses 1,172 || - 703 1,324
Special termination benefits and ||
curtailments 3,992 || - 27,500 650
------------------||--------------------------------------------------------
Net periodic benefit cost (income) $ 1,038 || $ (1,296) $ 23,891 $ (1,510)
============================================================================
</TABLE>
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
|| Postretirement Benefits
|| ------------------------
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
-----------------||---------------------------------------------------------
<S> <C> || <C> <C> <C>
Service cost $ 901 || $ 300 $ 1,382 $ 1,489
Interest cost 2,985 || 898 3,515 3,420
Expected return on plan assets (2,761) || (1,076) (4,422) (4,797)
Net amortization and recognized losses (1,043) || - - -
-------------------||---------------------------------------------------------
Net periodic benefit cost $ 82 || $ 122 $ 475 $ 112
==============================================================================
</TABLE>
Pension special termination benefits and curtailments cost relates to various
early retirement incentive and involuntary workforce reduction programs related
to the Company's downsizing and consolidation of operations.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $6.7 million, $3.2 million and zero, respectively, at
December 31, 1999 and $234.9 million, $187.4 million and $206.3 million,
respectively, at December 31, 1998.
For measurement purposes, a 5% annual rate of increase in the per capita cost of
covered health care benefits is assumed for 2000. The rate is assumed to
decrease gradually to 4% for 2002 and remain at that level thereafter. Assumed
health care cost trend rates have an effect on the amounts reported for the
postretirement health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
--------------- ---------------
<S> <C> <C>
Effect on total of service and interest cost components $ 224 $ (178)
Effect on the postretirement benefit obligation $1,679 $(1,378)
</TABLE>
<PAGE>
Iron Horse Investors, L.L.C.
Notes to Consolidated Financial Statements (continued)
8. Long-term Debt
Borrowings under long-term debt arrangements are as follows:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Senior credit facility $306,986 $149,843
Senior subordinated notes 200,000 200,000
--------------------------------
506,986 349,843
Less: current portion 16,643 23,086
--------------------------------
$490,343 $326,757
================================
</TABLE>
Senior Credit Facility
In October 1997, the Company entered into a senior credit facility that
included $495 million of term loan facilities and a $230 million revolving
credit facility. Outstanding borrowings on the term loan were $306,986 and
$149,843 at December 31, 1998 and 1999, respectively.
The term loan facilities bear interest at variable rates with a weighted
average rate of 6.75% and 8.82% at December 31, 1998 and 1999, respectively.
These loans are due through 2006 and provide for quarterly principal payments.
The revolving credit facility provides for loans and letters of credit and
matures in 2003. The Company has outstanding letters of credit under the
facility of $101 million at December 31, 1999. There was $129 million available
under the revolving credit facility at December 31, 1999. The Company is
obligated to pay a fee of 0.25% on the unused revolving credit facility.
Amounts outstanding under the senior credit facility are secured by a lien
on all the assets of the Company and its domestic subsidiaries and by a pledge
of all the stock of the Company and its domestic subsidiaries and two-thirds of
the stock of certain of the Company's foreign subsidiaries and joint ventures.
Mandatory prepayments and reductions of outstanding principal amounts are
required upon the occurrence of certain events. The senior credit facility
contains customary covenants restricting the incurrence of debt, encumbrances on
and sales of assets, limitations on mergers and certain acquisitions,
limitations on changes in control, provision for the maintenance of certain
financial ratios, and various other financial covenants and restrictions.
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
Senior Subordinated Notes
In October 1997, the Company issued $200 million of senior subordinated
notes. The senior subordinated notes are unsecured, bear interest at 8.75%
payable semiannually, and mature in 2007. The payment of principal and interest
is subordinated in right of payment to all senior debt.
The subordinated notes are not redeemable other than in connection with a
public equity offering or a change in control prior to November 2002, at which
time the notes may be redeemed at a premium, initially at 104.375% of the
principal amount. The subordinated notes have customary covenants for
subordinated debt facilities including the right to require repurchase upon a
change in control, restrictions on payment of dividends, and restrictions on the
acquisition of equity interests by the Company.
Annual Maturities
Annual maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
2000 $ 23,086
2001 23,086
2002 23,086
2003 23,085
2004 -
Thereafter 257,500
------------
Total $349,843
============
</TABLE>
Cash paid for interest was $2.9 million for the three months ended December
31, 1997, $45.4 million for the year ended December 31, 1998 and $36.2 million
for the year ended December 31, 1999.
9. Commitments and Contingencies
Operating Leases
The Company leases office space, plants and facilities, and various types
of manufacturing, data processing and transportation equipment. Rent expense for
the nine months ended September 30, 1997, the three months ended December 31,
1997, and the years ended December 31, 1998 and 1999 was $11.7 million, $6.4
million, $13.5 million and $12.4 million, respectively. Minimum future rentals
under noncancellable leases are estimated to be $11.4
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
million in 2000, $11.1 million in 2001, $10.5 million in 2002, $10.3 million in
2003, $9.5 million in 2004 and $9.7 million thereafter.
Legal Proceedings
Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in
connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit
against the Company and its prior owners in Minnesota state court. The lawsuit
arose out of a U.S. Army-directed termination for convenience in 1996 of certain
subcontract work under the program which, until the time of termination, had
been performed by Alliant and was thereafter replaced by a subcontract which the
Company awarded to another contractor, Sechan Electronics. The lawsuit has been
dismissed in response to pretrial motions by the Company. Management does not
believe that any appeal by Alliant of the dismissals would succeed, or that,
even in the case of a successful appeal, Alliant's suit would have a material
adverse effect on the Company.
The Company and its prior owners are also the defendants in a so-called qui
tam case filed under the U.S. Civil False Claims Act (the "FCA") by one present
and one former employee of the Company's Armament Systems Division in Fridley,
Minnesota, U.S. ex rel. Shukla v. United Defense, L.P., et al. The FCA, among
--------------------------------------------------
other things, permits private parties to seek, on behalf of the U.S. Government,
recovery of amounts which under certain circumstances have been improperly
claimed from the government by its contractors. Beyond recovery of the
Government's actual damages, the FCA also authorizes the recovery of multiple
penalties, and provides as well that the private plaintiffs may personally
receive 15-30% of any recovery obtained. The case primarily alleges that the
Company improperly obtained payment under various government contracts by
supplying components which did not comply with applicable technical
specifications. The Department of Justice has declined to intervene in the case.
The Company has filed an answer denying the material allegations in the case.
Management does not believe the outcome of this case will have a material
adverse effect on the Company.
The Company is also subject to other claims and lawsuits arising in the
ordinary course of business. Management believes that the outcome of any such
proceedings to which the Company is party will not have a material adverse
effect on the Company.
Environmental Matters
The Company spends certain amounts annually to maintain compliance with
environmental laws and to remediate contamination. Operating and maintenance
costs associated with environmental compliance and prevention of contamination
at the Company's facilities are a normal, recurring part of operations, are not
significant relative to total operating
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
costs or cash flows, and are generally allowable as contract costs under the
Company's contracts with the U.S. government (Allowable Costs).
As with compliance costs, a significant portion of the Company's
expenditures for remediation at its facilities consists of Allowable Costs.
Management believes that it has sufficient reserves to cover remediation costs
that are not allowable costs under its U.S. government contracts (Non-Allowable
Costs). In addition, pursuant to the terms of the acquisition of UDLP, the
Sellers are required to reimburse the Company for 75% of certain remediation
costs relating to operations prior to the acquisition that are Non-Allowable
Costs.
The Company has reflected a liability for the gross amount of environmental
remediation costs which it expects to be liable for after giving effect to
reimbursement under government contracts. The Company has recorded an asset for
the amounts expected to be reimbursed by the Sellers under the terms of the
acquisition agreement.
Turkey Joint Venture Offset Reserves
The Company's joint venture in Turkey is required by agreement with its
customer to achieve a significant level of export sales by October 2002 to meet
the "offset" requirements of the contract or pay a penalty of 9% of the unpaid
offset obligations. Such payment could be as high as $37 million if no
additional offset sales are completed. Production from a potential award which
would approximately halve the remaining liability is currently being pursued.
There can be no assurance that the joint venture will be able to complete this
potential sale, otherwise fulfill its offset obligations or renegotiate an
acceptable alternative. The Company has established reserves for its share of
the potential "offset" obligation at December 31, 1999.
10. Subsidiary Equity Plans
During 1998, UDI adopted the 1998 Stock Option Plan (the "Option Plan")
under which 1,500,000 shares of common stock were reserved for issuance at
December 31, 1998. The options generally vest over a period of 10 years;
however, vesting may be accelerated over 5 years if certain targets related to
earnings and cash flow are met.
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
Common stock options activity is as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
---------------------
<S> <C>
Options granted during 1998 and outstanding at December 31,
1998 1,436,000
Options granted 31,000
Options canceled 6,200
Options exercised 2,900
---------------------
Options outstanding at December 31, 1999 1,457,900
=====================
Options exercisable December 31, 1999 418,425
=====================
</TABLE>
Options were granted at $10 per share during the year ended December 31,
1998 and had an estimated grant date fair value of $4.51 per option. Options
granted in 1999 were at $20 per share and had an estimated grant date fair value
of $9.56 per option. The weighted-average exercise price and weighted-average
remaining contractual life of the stock options outstanding at December 31, 1999
was $10.40 and nine years, respectively.
Had compensation cost for the UDI's stock option plans been determined
based upon the fair value at the grant date for awards under the plan consistent
with the methodology prescribed under Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation, the Company's net loss in 1998
would have increased by approximatley $560,000, and the net income in 1999 would
have decreased by approximately $1,459,000. The effect of applying SFAS No. 123
on the net income (loss) as stated above is not necessarily representative of
the effects on reported net income (loss) for future years due to, among other
things, (1) the vesting period of the stock options and (2) additional stock
options that may be granted in future years.
The fair value of each option grant is estimated on the date of grant using
the minimum value model with the following assumptions used for grants in 1998
and 1999: dividend yield of 0%; risk-free interest rate of 6% and 6.5%
respectively; and expected life of the option term of 10 years.
Employee Stock Purchase Plan
Under an Employee Stock Purchase Plan (the "ESPP") adopted by UDI, certain
employees are provided the opportunity to purchase shares of UDI's common stock
at its estimated fair value. Certain of these purchases were eligible for
financing provided by UDI. Related loans including interest at 7.5%, are due in
five years. During 1998, 739,624 shares were sold at a price of $10 per share.
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
The provision for income taxes for the nine months ended September 30, 1997
and the year ended December 31, 1998 was solely for federal income taxes payable
by the Company's Foreign Sales Corporation ("FSC") subsidiary. The FSC paid
income taxes amounting to $1.1 million, $3.3 million, and $1.7 million during
the nine months ended September 30, 1997, and the years ended December 31, 1998
and 1999, respectively. For the year ended December 31, 1999, the provision for
income taxes also includes alternative minimum tax currently payable by the
Company of $1.2 million.
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 42,224 $ 43,113
Net operating loss carryforwards 111,110 88,093
Depreciation 22,496 13,701
Other - 2,954
--------------------------------------
175,830 147,861
Deferred tax liabilities:
Intangibles, accrued compensation, and benefits (109,634) (84,994)
Other (1,799) -
--------------------------------------
(111,433) (84,994
--------------------------------------
Net deferred tax asset 64,397 62,867
Valuation allowance (64,397) (62,867)
--------------------------------------
Net deferred taxes on balance sheet $ - $ -
======================================
</TABLE>
The net deferred tax asset at December 31, 1998 and 1999 has been offset by
a valuation allowance. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible and
subject to any limitations applied to the use of carryforward tax attributes.
The Company has approximately $220 million in net operating loss
carryforwards which expire at varying dates through 2018.
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
To reduce the impact of changes in interest rates on its floating rate
debt, the Company entered into a three-year interest rate swap agreement that
expires in October 2000 for a notional amount of $160 million. A swap agreement
is a contract to exchange floating rate interest payments for fixed rate
payments periodically over the term of the agreement without the exchange of the
underlying notional amount. The notional amount is used to measure the interest
to be paid or received and does not represent the amount of exposure to credit
loss.
The agreement entitles the Company to pay a base interest rate amount of
5.75%, in return for the right to receive a floating interest rate which is
based on the three-month LIBOR as of the quarterly measurement date. In the
event the three-month LIBOR at the measurement date exceeds 6.99% the base
interest rate is adjusted to the then effective LIBOR up to a maximum rate of
9%. The net cash amounts paid or received on the agreement are accrued and
recognized as an adjustment to interest expense.
The fair value of interest rate instruments are the estimated amounts the
Company would have to pay to terminate the agreement, taking into account the
current interest rates and the creditworthiness of the parties to the agreement.
At December 31, 1999, the termination value of the swap (i.e., the fair value)
was $.7 million in favor of the Company.
The carrying amount of the Company's financial instruments included in
current assets and current liabilities approximates their fair value due to
their short-term nature. At December 31, 1998, the fair market value of the
Company's long-term debt was estimated to be $307.0 million and $202.0 million
for the senior credit facility and subordinated debt, respectively. At December
31, 1999, the fair market value of the Company's long-term debt was estimated to
be $149.8 million and $191.5 million for the senior credit facility and
subordinated debt, respectively.
13. Significant Customer and Export Sales
Sales to various agencies of the U.S. Government aggregated $625.5 million,
$203.1 million, $968.3 million and $995.0 million during the nine months ended
September 30, 1997, the three months ended December 31, 1997, and the years
ended December 31, 1998 and 1999, respectively.
At December 31, 1998 and 1999, trade accounts receivable from the U.S.
Government totaled $50.8 million and $29.8 million, respectively.
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
Export sales, including sales to foreign governments transacted through the
U.S. Government, were $264.5 million, $89.1 million, $230.3 million and $218.6
million during the nine months ended September 30, 1997, the three months ended
December 31, 1997, the years ended December 31, 1998 and 1999, respectively.
14. Related Party Transactions
Through September 30, 1997, UDLP contracted with FMC for various
administrative and support services. These services included computer services,
systems and programming, data communications, employee relocation support,
payroll processing, insurance and general management support. During the nine
months ended September 30, 1997, UDLP paid $22.3 million to FMC for their
support.
UDLP also leased office and manufacturing facilities in San Jose,
California from FMC. Under the lease agreement monthly rent payments were
comprised of fixed base rent plus depreciation on the facilities. During the
nine months ended September 30, 1997, UDLP incurred rent amounting to $2.6
million under this lease.
Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5
million, which was included in the transaction costs for advisory services
related to the placement of the Senior and Senior Subordinated financing.
Additionally, during 1998 Carlyle provided consulting assistance in development
of management operating policies and procedures, for which the Company incurred
a charge to operations of $2.0 million. The management agreement between the
Company and Carlyle requires an annual fee of $2.0 million for various
management services. During the three months ended December 31, 1997 and the
years ended December 31, 1998 and 1999, the Company recorded $0.5 million, $2.0
million and $2.0 million, respectively, of charges relating to these services.
15. Restructuring
During the third quarter of 1998, the Company approved a restructuring plan
designed to rationalize production and lower costs at the Armament Systems
Division's Fridley, Minnesota facility. The plan calls for shifting a
significant portion of production and final assembly to other Company sites and
outsourcing certain other operations. In 1998 the Company recorded a charge of
$36.2 million for estimated employee termination expenses, acceleration of
recognition for benefit costs that were curtailed, and charges for impaired
assets. This charge will not significantly impact operating funds as it mostly
represents either asset write-offs or costs that will be provided for out of an
overfunded pension plan. There were no adjustments to the recorded provisions
during 1999. Remaining accrued expenses are $ 1.6 million at December
<PAGE>
Iron Horse Investors, L.L.C
Notes to Consolidated Financial Statements (continued)
31, 1999. The Company anticipates the restructuring activity will be complete in
the third quarter 2000 with the final relocation of production to another site.
16. Employees' Thrift Plan
Substantially all of the Company's employees are eligible to participate in
defined contribution savings plans designed to comply with the requirements of
the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k)
of the Internal Revenue Code. Charges against income for matching contributions
to the plans were $7.1 million, $1.4 million, $8.1 million, and $8.1 million, in
the nine months ended September 30, 1997, the three months ended December 31,
1997, and the years ended December 31, 1998 and 1999, respectively.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
United Defense Industries, Inc.
We have audited the accompanying consolidated balance sheets of United Defense
Industries, Inc. (a wholly owned subsidiary of Iron Horse Investors, L.L.C.) and
subsidiaries as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the three
months ended December 31, 1997 and the years ended December 31, 1998 and 1999.
We have also audited the consolidated statements of operations, partners'
capital, and cash flows of United Defense, L.P. (predecessor) and subsidiaries
for the nine months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Defense
Industries, Inc. and subsidiaries at December 31, 1998 and 1999 and the
consolidated results of their operations and their cash flows for the three
months ended December 31, 1997 and the years ended December 31, 1998 and 1999,
and the consolidated results of operations and cash flows of United Defense,
L.P. and subsidiaries for the nine months ended September 30, 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
January 31, 2000
Washington D.C.
<PAGE>
United Defense Industries, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Assets December 31, 1998 December 31, 1999
------------------------------------------------
<S> <C> <C>
Current assets:
Cash and marketable securities $85,520 $94,325
Trade receivables 64,395 57,198
Inventories 254,343 254,750
Other current assets 4,255 4,056
------------------------------------------------
Total current assets 408,513 410,329
Property, plant and equipment, net 122,721 84,693
Intangible assets, net 330,024 254,276
Prepaid pension and postretirement cost 123,912 119,883
Other assets 4,571 4,817
------------------------------------------------
Total assets $989,741 $873,998
================================================
Liabilities and Equity
Current liabilities:
Current portion of long-term debt $16,643 $23,086
Accounts payable, trade and other 88,497 64,639
Advanced payments 258,395 303,065
Accrued and other liabilities 75,832 91,340
------------------------------------------------
Total current liabilities 439,367 482,130
Long-term liabilities net of current portion:
Accrued pension and postretirement cost 14,610 5,075
Long-term debt 490,343 326,757
Other liabilities 22,630 35,675
------------------------------------------------
Total liabilities 966,950 849,637
Commitments and contingencies (Notes 8 & 9)
Stockholders' Equity:
Common Stock $.01 par value, 20,000,000 authorized;
18,039,624 and 18,042,524 issued and outstanding
at December 31, 1998 and 1999 180 180
Additional paid-in-capital 180,216 180,245
Stockholders' loans (1,339) (1,339)
Retained deficit (156,266) (154,725)
------------------------------------------------
Total stockholders' equity 22,791 24,361
------------------------------------------------
Total liabilities and stockholders' equity $989,741 $873,998
================================================
</TABLE>
See accompanying notes.
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
-------------------||-----------------------------------------------------------
<S> <C> || <C> <C> <C>
Revenue: ||
Sales $913,925 || $342,627 $1,217,555 $1,213,526
||
Costs and expenses: ||
Cost of sales 754,977 || 324,123 1,099,291 991,907
Selling, general and ||
administrative expenses 91,413 || 34,947 177,449 167,877
Research and development 12,096 || 4,558 13,021 12,782
-------------------||-----------------------------------------------------------
Total expenses 858,486 || 363,628 1,289,761 1,172,566
||
Earnings related to investments ||
in foreign affiliates 13,521 || 432 6,208 533
-------------------||-----------------------------------------------------------
Income(loss) from operations 68,960 || (20,569) (65,998) 41,493
||
Other income (expense): ||
Interest income 1,456 || - 1,396 1,820
Interest expense - || (15,622) (52,155) (38,835)
Miscellaneous, net - || (68) - -
-------------------||-----------------------------------------------------------
Total other income (expense) 1,456 || (15,690) (50,759) (37,015)
-------------------||-----------------------------------------------------------
||
Income(loss) before income taxes 70,416 || (36,259) (116,757) 4,478
||
Provision for income taxes 1,523 || - 3,250 2,937
-------------------||-----------------------------------------------------------
||
Net income(loss) $68,893 || ($36,259) ($120,007) $1,541
================================================================================
</TABLE>
See accompanying notes.
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of
Partners' Capital and Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional
Partners' Common Paid-In Retained Stockholders'
(Predecessor) Capital Stock Capital Deficit Loans Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,1997 $ 179,638 $ - $ - $ - $ - $ 179,638
Distributions (114,409) - - - - (114,409)
Liabilities transferred from FMC (3,120) - - - - (3,120)
Net income for the nine months
ended September 30, 1997 68,893 - - - - 68,893
--------------------------------------------------------------------------------------
Balance, September 30, 1997 $131,002 $ - $ - $ - $ - $ 131,002
======================================================================================
======================================================================================
Balance, October 1, 1997 $ - $ - $ - $ - $ - $ -
Issuance of common stock - 173 172,827 - - 173,000
Net loss for the three months
ended December 31, 1997 - - - (36,259) - (36,259)
--------------------------------------------------------------------------------------
Balance, December 31, 1997 - 173 172,827 (36,259) - 136,741
Issuance of Common Stock - 7 7,389 - (1,339) 6,057
Net loss for the year
ended December 31, 1998 - - - (120,007) - (120,007)
--------------------------------------------------------------------------------------
Balance, December 31, 1998 - 180 180,216 (156,266) ($1,339) 22,791
Issuance of common stock - - 29 - - 29
Net income for the year
ended December 31, 1999 - - - 1,541 - 1,541
--------------------------------------------------------------------------------------
Balance, December 31, 1999 $ - $ 180 $ 180,245 ($ 154,725) ($1,339) $ 24,361
======================================================================================
</TABLE>
See accompanying notes.
<PAGE>
United Defense Industries, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
---------------||---------------------------------------------
<S> <C> || <C> <C> <C>
Operating activities ||
Net income (loss) $ 68,893 || ($36,259) ($120,007) $ 1,541
Adjustments to reconcile net income (loss) to cash ||
provided by operating activities: ||
Depreciation 19,331 || 20,660 83,153 55,528
Amortization 9,673 || 16,263 94,806 80,317
Other (4,039) || 9,001 5,291 1,123
Changes in assets and liabilities: ||
Trade receivables 7,600 || (13,335) 30,452 7,197
Inventories 15,546 || 92,875 76,030 (407)
Other assets (745) || (2,187) 1,636 474
Prepaid pension and postretirement benefit cost (8,783) || (2,736) 15,519 4,029
Accounts payable, trade and other (14,585) || 17,639 (5,144) (23,858)
Advanced payments 15,082 || (12,671) (3,006) 44,670
Accrued and other liabilities 11,626 || (16,717) 14,360 28,554
Accrued pension and postretirement benefit cost 3,181 || (475) 4,212 (9,535)
---------------||---------------------------------------------
Cash provided by operating activities 122,780 || 72,058 197,302 189,633
---------------||---------------------------------------------
||
Investing activities ||
Capital spending (23,722) || (15,893) (24,020) (25,246)
Disposal of property, plant and equipment 6,938 || 3,170 7,298 1,532
Short term investment with FMC Corporation 19,497 || - - -
Purchase of business (net of $11,107 cash acquired) - || (838,893) - -
Adjustment to purchase price of business - || - 16,074 -
---------------||---------------------------------------------
Cash provided by (used in) investing activities 2,713 || (851,616) (648) (23,714)
---------------||---------------------------------------------
||
Financing activities ||
Partner distributions (114,409) || - - -
Payments on long-term debt - || (47,200) (152,814) (157,143)
Payments for financing and transaction costs - || (28,726) - -
Proceeds from issuance of long-term debt - || 707,000 - -
Proceeds from sale of common stock by subsidiary - || 173,000 6,057 29
---------------||---------------------------------------------
Cash (used in) provided by financing activities (114,409) || 804,074 (146,757) (157,114)
---------------||---------------------------------------------
||
Increase in cash and marketable securities 11,084 || 24,516 49,897 8,805
Cash and marketable securities, beginning of period 23 || 11,107 35,623 85,520
---------------||---------------------------------------------
Cash and marketable securities, end of period $ 11,107 || $ 35,623 $ 85,520 $ 94,325
==============================================================
</TABLE>
See accompanying notes.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
United Defense Industries, Inc. (the "Company") is a subsidiary of Iron
Horse Investors, L.L.C. ("Iron Horse") and is organized under the laws of the
state of Delaware and was formed for the primary purpose of facilitating the
acquisition of United Defense, L.P. ("UDLP") by Iron Horse. Iron Horse is owned
by an investment group led by the Carlyle Group ("Carlyle"). On October 6, 1997,
the Company acquired 100% of the partnership interests of UDLP from FMC
Corporation ("FMC") and Harsco Corporation ("Harsco") (the "Sellers"). As a
result of adjustments to the carrying value of assets and liabilities pursuant
to this transaction (see Note 3), the financial position and results of
operations for periods subsequent to the acquisition are not comparable to UDLP
amounts.
The Company designs, develops and manufactures various tracked armored
combat vehicles and a wide spectrum of weapons delivery systems for the armed
forces of the United States and nations around the world.
The financial statements include the accounts of the Company and its
subsidiaries. Prior to the acquisition, the financial statements include the
accounts of UDLP and its subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates of contract cost and revenues used
in the earnings recognition process. Actual results could differ from those
estimates.
Cash and Marketable Securities
Cash and marketable securities consist of investments with initial
maturities of three months or less.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
provided principally on the sum-of-the-years digits and straight-line methods
over estimated useful lives of the assets (land improvements--twenty years;
buildings--twenty to thirty-five years; and machinery and equipment--two to
twelve years).
Maintenance and repairs are expensed as incurred. Expenditures that extend
the useful life of property, plant and equipment or increase its productivity
are capitalized and depreciated.
Long-lived Assets, Including Intangible Assets and Goodwill
The Company evaluates on a quarterly basis its long-lived assets to be held
and used, including certain identifiable intangible assets and goodwill, to
determine whether any events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company bases its
evaluation on such impairment indicators as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be
present. If such impairment indicators are present or other factors exist that
indicate that the carrying amount of the asset may not be recoverable, the
Company would use an estimate of the undiscounted value of expected future
operating cash flows to determine whether the asset is recoverable and measure
the amount of the impairment based on the difference between the carrying amount
of the asset and its estimated fair value.
Investments in Affiliated Companies
The Company's investment in a majority owned foreign joint venture in
Turkey is carried at cost since there is uncertainty regarding the ability to
control the venture or to repatriate earnings. Income is recognized as dividends
are received. Dividends received net of amounts accrued for taxes and future
obligations were $5.3 million for the nine months ended September 30, 1997, $0
for the three months ended December 31, 1997, and $4.6 million for the year
ended December 31, 1998. A provision of $1.1 million was recorded for the year
ended December 31, 1999.
The Company's investment in a foreign joint venture in Saudi Arabia is
accounted for by using the equity method. Equity in earnings from this
investment was $8.2 million for the nine months ended September 30, 1997, $0.4
million for the three months ended December 31, 1997, $1.6 million for the year
ended December 31, 1998, and $1.6 million for the year ended December 31, 1999.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Advanced Payments
Advanced payments by customers for deposits on orders not yet billed and
progress payments on contracts-in-progress are recorded as current liabilities.
Revenue and Profit Recognition for Contracts-in-Progress
The Company recognizes sales on most production contracts as deliveries are
made or accepted. Gross margin on sales is based on the estimated margin to be
realized over the life of the related contract. Sales under cost reimbursement
contracts for research, engineering, prototypes, repair and maintenance and
certain other contracts are recorded when funded, as costs are incurred and
include estimated fees in the proportion that costs incurred to date bear to
total estimated costs. Changes in estimates for sales and profits are recognized
in the period in which they are determinable using the cumulative catch-up
method. Claims are considered in the estimated contract performance at such time
as realization is probable. Any anticipated losses on contracts (i.e., cost of
sales exceeds sales) are charged to operations as soon as they are determinable.
Gross profit for the nine months ended September 30, 1997 includes
approximately $13.5 million of noncash charges for changes in estimated contract
profitability related to contractual issues with customers and other matters
resulting from the periodic reassessment of the estimated profitability of
contracts in progress.
Stock-Based Compensation
Provided the option price is not less than fair value of the common stock
at the date an option is granted, the Company records no compensation expense in
its consolidated statements of operations. See Note 10 for the pro forma effect
on operating results had the Company recorded compensation expense for the fair
value of stock options.
Income Taxes
As a limited partnership, income earned by UDLP passed to its partners and
was taxable at that level, except for taxes payable on the income of UDLP's
Foreign Sales Corporation ("FSC") subsidiary.
As a corporation, the Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws expected to be effective when
these differences reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. Business Purchase
On October 5, 1997, the Company acquired 100% of the partnership interests
of UDLP and certain other related business assets of FMC. The purchase price
including expenses was $864 million after an adjustment of $16 million agreed to
during 1998. The Company financed the acquisition through a cash equity
investment of $173 million and debt (see Note 8). The acquisition was accounted
for using the purchase method of accounting.
The excess purchase price over the book value of the net assets acquired in
the amount of $733 million was allocated to inventory; property, plant and
equipment; other tangible assets; and intangible assets based on management's
estimate of their fair values. The excess purchase price over the fair value of
the net assets acquired was allocated to goodwill.
4. Inventories
The majority of the Company's inventories are recorded at cost determined
on a LIFO basis. Inventory costs include manufacturing overhead.
The current replacement cost of LIFO inventories exceeded their recorded
values by approximately $5.2 million at December 31, 1998 and December 31, 1999.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Buildings $ 38,213 $ 39,978
Machinery and equipment 160,788 166,257
Land and improvements 7,802 8,126
Construction in progress 7,500 7,754
--------------------------------
214,303 222,115
Less: accumulated depreciation (91,582) (137,422)
--------------------------------
Net property, plant and equipment $122,721 $ 84,693
================================
</TABLE>
6. Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
-------------------------------
<S> <C> <C>
Software and other intangibles $ 75,200 $ 92,119
Firm business and ongoing programs 225,103 225,103
Goodwill 125,130 124,339
--------------------------------
425,433 441,561
Less: accumulated amortization (95,409) (187,285)
--------------------------------
Net intangible assets $330,024 $ 254,276
===============================
</TABLE>
The Company's software and other intangibles are being amortized over their
estimated useful lives on a straight-line basis over three to five years or
using other methods based on revenues of related contracts or programs. The
excess of purchase cost over the fair value of the net assets acquired
(goodwill) that resulted from the application of purchase accounting for the
acquisition of UDLP is being amortized over thirty years.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Pensions and Other Postretirement Benefits
Substantially all of the Company's domestic employees are covered by
retirement plans. Plans covering salaried employees provide pension benefits
based on years of service and compensation. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
Company's funding policy is to make contributions based on the projected unit
credit method and to limit contributions to amounts that are currently
deductible for tax purposes.
Substantially all of the Company's employees are also covered by
postretirement health care and life insurance benefit programs. Employees
generally become eligible to receive benefits under these plans after they
retire when they meet minimum retirement age and service requirements. The cost
of providing most of these benefits is shared with retirees. The Company has
reserved the right to change or eliminate these benefit plans.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The change in benefit obligation and plan assets of the plans and prepaid
or accrued pension and postretirement costs recognized in the balance sheets at
December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1999 1998 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $348,199 $442,651 $ 52,992 $54,795
Service cost 11,751 13,747 1,382 1,489
Interest cost 27,017 27,982 3,515 3,420
Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594)
Actuarial (gain) loss 61,576 (38,130) 1,236 (4,923)
Plan amendments - 1,238 - -
Special termination benefits and
curtailments 16,397 - - -
------------------------------------------------------------------------------
Benefit obligation at end of year 442,651 422,314 54,795 49,187
Change in plan assets
Fair value of plan assets at beginning
of year 480,522 548,003 49,702 60,412
Assets transferred from Sellers 4,469 - - -
Actual return on plan assets 82,668 13,874 12,830 (6,558)
Employer contributions 2,633 1,066 2,210 3,568
Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594)
------------------------------------------------------------------------------
Fair value of plan assets at end of year 548,003 537,769 60,412 51,828
------------------------------------------------------------------------------
Funded status 105,352 115,455 5,617 2,641
Unrecognized actuarial (gain) loss 1,626 (6,012) (7,420) (1,514)
Unrecognized prior service cost 4,127 4,238 - -
------------------------------------------------------------------------------
Net amount recognized $111,105 $113,681 $(1,803) $ 1,127
==============================================================================
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid pension and postretirement
benefit cost $123,912 $118,756 $ - $ 1,127
Accrued pension and postretirement
benefit cost (12,807) (5,075) (1,803) -
------------------------------------------------------------------------------
Net amount recognized $111,105 $113,681 $(1,803) $ 1,127
===========================================================================
</TABLE>
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the assumptions used in the determination of net
pension and postretirement benefit costs and benefit obligations for the nine
months ended September 30, 1997, the three months ended December 31, 1997, and
the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Nine months Three months Year Year
ended ended ended Ended
September 30, December 31, December 31, December 31,
1997 1997 1998 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 8.00% 7.00% 6.50% 7.50%
Expected return on plan assets 9.62% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 4.00% 3.50% 5.00%
</TABLE>
The following tables show the components of the net periodic benefit cost (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits
----------------
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
--------------------||---------------------------------------------------------
<S> <C> || <C> <C> <C>
Service cost $ 7,286 || $ 3,275 $ 11,751 $ 13,747
Interest cost 16,309 || 5,941 27,017 27,982
Expected return on plan assets (27,721) || (10,512) (43,080) (45,213)
Net amortization and recognized losses 1,172 || - 703 1,324
Special termination benefits and ||
curtailments 3,992 || - 27,500 650
--------------------||---------------------------------------------------------
Net periodic benefit cost (income) $ 1,038 || $ (1,296) $ 23,891 $ (1,510)
===============================================================================
</TABLE>
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Postretirement Benefits
------------------------
Nine months || Three months Year Year
ended || ended ended ended
September 30, || December 31, December 31, December 31,
1997 || 1997 1998 1999
----------------||------------------------------------------------------
<S> <C> || <C> <C> <C>
Service cost $ 901 || $ 300 $ 1,382 $ 1,489
Interest cost 2,985 || 898 3,515 3,420
Expected return on plan assets (2,761) || (1,076) (4,422) (4,797)
Net amortization and recognized losses (1,043) || - - -
----------------||------------------------------------------------------
Net periodic benefit cost $ 82 || $ 122 $ 475 $ 112
========================================================================
</TABLE>
Pension special termination benefits and curtailments cost relates to various
early retirement incentive and involuntary workforce reduction programs related
to the Company's downsizing and consolidation of operations.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $6.7 million, $3.2 million and zero, respectively, at
December 31, 1999 and $234.9 million, $187.4 million and $206.3 million,
respectively, at December 31, 1998.
For measurement purposes, a 5% annual rate of increase in the per capita cost of
covered health care benefits is assumed for 2000. The rate is assumed to
decrease gradually to 4% for 2002 and remain at that level thereafter. Assumed
health care cost trend rates have an effect on the amounts reported for the
postretirement health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components $ 224 $ (178)
Effect on the postretirement benefit obligation $ 1,679 $ (1,378)
</TABLE>
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Long-term Debt
Borrowings under long-term debt arrangements are as follows:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Senior credit facility $ 306,986 $ 149,843
Senior subordinated notes 200,000 200,000
--------------------------------
506,986 349,843
Less: current portion 16,643 23,086
--------------------------------
$ 490,343 $ 326,757
================================
</TABLE>
Senior Credit Facility
In October 1997, the Company entered into a senior credit facility that
included $495 million of term loan facilities and a $230 million revolving
credit facility. Outstanding borrowings on the term loan were $306,986 and
$149,843 at December 31, 1998 and 1999, respectively.
The term loan facilities bear interest at variable rates with a weighted
average rate of 6.75% and 8.82% at December 31, 1998 and 1999, respectively.
These loans are due through 2006 and provide for quarterly principal payments.
The revolving credit facility provides for loans and letters of credit and
matures in 2003. The Company has outstanding letters of credit under the
facility of $101 million at December 31, 1999. There was $129 million available
under the revolving credit facility at December 31, 1999. The Company is
obligated to pay a fee of 0.25% on the unused revolving credit facility.
Amounts outstanding under the senior credit facility are secured by a lien
on all the assets of the Company and its domestic subsidiaries and by a pledge
of all the stock of the Company and its domestic subsidiaries and two-thirds of
the stock of certain of the Company's foreign subsidiaries and joint ventures.
Mandatory prepayments and reductions of outstanding principal amounts are
required upon the occurrence of certain events. The senior credit facility
contains customary covenants restricting the incurrence of debt, encumbrances on
and sales of assets, limitations on mergers and certain acquisitions,
limitations on changes in control, provision for the maintenance of certain
financial ratios, and various other financial covenants and restrictions.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Senior Subordinated Notes
In October 1997, the Company issued $200 million of senior subordinated
notes. The senior subordinated notes are unsecured, bear interest at 8.75%
payable semiannually, and mature in 2007. The payment of principal and interest
is subordinated in right of payment to all senior debt.
The subordinated notes are not redeemable other than in connection with a
public equity offering or a change in control prior to November 2002, at which
time the notes may be redeemed at a premium, initially at 104.375% of the
principal amount. The subordinated notes have customary covenants for
subordinated debt facilities including the right to require repurchase upon a
change in control, restrictions on payment of dividends, and restrictions on the
acquisition of equity interests by the Company.
Annual Maturities
Annual maturities of long-term debt are as follows (in thousands):
Year ended December 31,
----------------------
2000 $ 23,086
2001 23,086
2002 23,086
2003 23,085
2004 -
Thereafter 257,500
----------
Total $ 349,843
==========
Cash paid for interest was $2.9 million for the three months ended December
31, 1997, $45.4 million for the year ended December 31, 1998 and $36.2 million
for the year ended December 31, 1999.
9. Commitments and Contingencies
Operating Leases
The Company leases office space, plants and facilities, and various types
of manufacturing, data processing and transportation equipment. Rent expense
for the nine months ended September 30, 1997, the three months ended December
31, 1997, and the years ended December 31, 1998 and 1999 was $11.7 million, $6.4
million, $13.5 million and $12.4 million,
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
respectively. Minimum future rentals under noncancellable leases are estimated
to be $11.4 million in 2000, $11.1 million in 2001, $10.5 million in 2002, $10.3
million in 2003, $9.5 million in 2004 and $9.7 million thereafter.
Legal Proceedings
Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in
connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit
against the Company and its prior owners in Minnesota state court. The lawsuit
arose out of a U.S. Army-directed termination for convenience in 1996 of certain
subcontract work under the program which, until the time of termination, had
been performed by Alliant and was thereafter replaced by a subcontract which the
Company awarded to another contractor, Sechan Electronics. The lawsuit has been
dismissed in response to pretrial motions by the Company. Management does not
believe that any appeal by Alliant of the dismissals would succeed, or that,
even in the case of a successful appeal, Alliant's suit would have a material
adverse effect on the Company.
The Company and its prior owners are also the defendants in a so-called qui
tam case filed under the U.S. Civil False Claims Act (the "FCA") by one present
and one former employee of the Company's Armament Systems Division in Fridley,
Minnesota, U.S. ex rel. Shukla v. United Defense L.P., et al. The FCA, among
-------------------------------------------------
other things, permits private parties to seek, on behalf of the U.S. Government,
recovery of amounts which under certain circumstances have been improperly
claimed from the government by its contractors. Beyond recovery of the
Government's actual damages, the FCA also authorizes the recovery of multiple
penalties, and provides as well that the private plaintiffs may personally
receive 15-30% of any recovery obtained. The case primarily alleges that the
Company improperly obtained payment under various government contracts by
supplying components which did not comply with applicable technical
specifications. The Department of Justice has declined to intervene in the case.
The Company has filed an answer denying the material allegations in the case.
Management does not believe the outcome of this case will have a material
adverse effect on the Company.
The Company is also subject to other claims and lawsuits arising in the
ordinary course of business. Management believes that the outcome of any such
proceedings to which the Company is party will not have a material adverse
effect on the Company.
Environmental Matters
The Company spends certain amounts annually to maintain compliance with
environmental laws and to remediate contamination. Operating and maintenance
costs associated with environmental compliance and prevention of contamination
at the Company's
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
facilities are a normal, recurring part of operations, are not significant
relative to total operating costs or cash flows, and are generally allowable as
contract costs under the Company's contracts with the U.S. government (Allowable
Costs).
As with compliance costs, a significant portion of the Company's
expenditures for remediation at its facilities consists of Allowable Costs.
Management believes that it has sufficient reserves to cover remediation costs
that are not allowable costs under its U.S. government contracts (Non-Allowable
Costs). In addition, pursuant to the terms of the acquisition of UDLP, the
Sellers are required to reimburse the Company for 75% of certain remediation
costs relating to operations prior to the acquisition that are Non-Allowable
Costs.
The Company has reflected a liability for the gross amount of environmental
remediation costs which it expects to be liable for after giving effect to
reimbursement under government contracts. The Company has recorded an asset for
the amounts expected to be reimbursed by the Sellers under the terms of the
acquisition agreement.
Turkey Joint Venture Offset Reserves
The Company's joint venture in Turkey is required by agreement with its
customer to achieve a significant level of export sales by October 2002 to meet
the "offset" requirements of the contract or pay a penalty of 9% of the unpaid
offset obligations. Such payment could be as high as $37 million if no
additional offset sales are completed. Production from a potential award which
would approximately halve the remaining liability is currently being pursued.
There can be no assurance that the joint venture will be able to complete this
potential sale, otherwise fulfill its offset obligations or renegotiate an
acceptable alternative. The Company has established reserves for its share of
the potential "offset" obligation at December 31, 1999.
10. Stockholders' Equity
Common Stock Options
During 1998, the Company adopted the 1998 Stock Option Plan (the "Option
Plan") under which 1,500,000 shares of common stock were reserved for issuance
at December 31, 1998. The options generally vest over a period of 10 years;
however, vesting may be accelerated over 5 years if certain targets related to
earnings and cash flow are met.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Common stock options activity is as follows:
Year ended
December 31, 1999
-----------------
Options granted during 1998 and outstanding at
December 31, 1998 1,436,000
Options granted 31,000
Options canceled 6,200
Options exercised 2,900
-----------------
Options outstanding at December 31, 1999 1,457,900
=================
Options exercisable December 31, 1999 418,425
=================
Options were granted at $10 per share during the year ended December 31,
1998 and had an estimated grant date fair value of $4.51 per option. Options
granted in 1999 were at $20 per share and had an estimated grant date fair value
of $9.56 per option. The weighted-average exercise price and weighted-average
remaining contractual life of the stock options outstanding at December 31, 1999
was $10.40 and nine years, respectively.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plan consistent
with the methodology prescribed under Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation, the Company's net loss in 1998
would have increased by approximately $560,000, and the net income in 1999 would
have decreased by approximately $1,459,000. The effect of applying SFAS No. 123
on the net income (loss) as stated above is not necessarily representative of
the effects on reported net income (loss) for future years due to, among other
things, (1) the vesting period of the stock options and (2) additional stock
options that may be granted in future years.
The fair value of each option grant is estimated on the date of grant using
the minimum value model with the following assumptions used for grants in 1998
and 1999: dividend yield of 0%; risk-free interest rate of 6% and 6.5%; and
expected life of the option term of 10 years.
Employee Stock Purchase Plan
Under an Employee Stock Purchase Plan (the "ESPP"), certain employees are
provided the opportunity to purchase shares of the Company's common stock at its
estimated fair value. Certain of these purchases were eligible for financing
provided by the Company. Related loans including interest at 7.5%, are due in
five years. During 1998, 739,624 shares were sold at a price of $10 per share.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
The provision for income taxes for the nine months ended September 30, 1997
and the year ended December 31, 1998 was solely for federal income taxes payable
by the Company's Foreign Sales Corporation ("FSC") subsidiary. The FSC paid
income taxes amounting to $1.1 million, $3.3 million, and $1.7 million during
the nine months ended September 30, 1997, and the years ended December 31, 1998
and 1999, respectively. For the year ended December 31, 1999, the provision
for income taxes also includes alternative minimum tax currently payable by the
Company of $1.2 million.
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1999
-------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 42,224 $ 43,113
Net operating loss carryforwards 111,110 88,093
Depreciation 22,496 13,701
Other - 2,954
-------------------
175,830 147,861
Deferred tax liabilities:
Intangibles, accrued compensation, and benefits (109,634) (84,994)
Other (1,799) -
-------------------
(111,433) (84,994)
Net deferred tax asset 64,397 62,867
Valuation allowance (64,397) (62,867)
-------------------
Net deferred taxes on balance sheet $ - $ -
===================
</TABLE>
The net deferred tax asset at December 31, 1998 and 1999 has been offset by
a valuation allowance. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible and
subject to any limitations applied to the use of carryforward tax attributes.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
The Company has approximately $220 million in net operating loss
carryforwards which expire at varying dates through 2018.
12. Fair Value of Financial Instruments
To reduce the impact of changes in interest rates on its floating rate
debt, the Company entered into a three-year interest rate swap agreement that
expires in October 2000 for a notional amount of $160 million. A swap agreement
is a contract to exchange floating rate interest payments for fixed rate
payments periodically over the term of the agreement without the exchange of the
underlying notional amount. The notional amount is used to measure the interest
to be paid or received and does not represent the amount of exposure to credit
loss.
The agreement entitles the Company to pay a base interest rate amount of
5.75%, in return for the right to receive a floating interest rate which is
based on the three-month LIBOR as of the quarterly measurement date. In the
event the three-month LIBOR at the measurement date exceeds 6.99% the base
interest rate is adjusted to the then effective LIBOR up to a maximum rate of
9%. The net cash amounts paid or received on the agreement are accrued and
recognized as an adjustment to interest expense.
The fair value of interest rate instruments are the estimated amounts the
Company would have to pay to terminate the agreement, taking into account the
current interest rates and the creditworthiness of the parties to the agreement.
At December 31, 1999, the termination value of the swap (i.e., the fair value)
was $.7 million in favor of the Company.
The carrying amount of the Company's financial instruments included in
current assets and current liabilities approximates their fair value due to
their short-term nature. At December 31, 1998, the fair market value of the
Company's long-term debt was estimated to be $307.0 million and $202.0 million
for the senior credit facility and subordinated debt, respectively. At December
31, 1999, the fair market value of the Company's long-term debt was estimated to
be $149.8 million and $191.5 million for the senior credit facility and
subordinated debt, respectively.
13. Significant Customer and Export Sales
Sales to various agencies of the U.S. Government aggregated $625.5 million,
$203.1 million, $968.3 million and $995.0 million during the nine months ended
September 30, 1997, the three months ended December 31, 1997, and the years
ended December 31, 1998 and 1999, respectively.
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
At December 31, 1998 and 1999, trade accounts receivable from the U.S.
Government totaled $50.8 million and $29.8 million, respectively.
Export sales, including sales to foreign governments transacted through the
U.S. Government, were $264.5 million, $89.1 million, $230.3 million and $218.6
million during the nine months ended September 30, 1997, the three months ended
December 31, 1997, the years ended December 31, 1998 and 1999, respectively.
14. Related Party Transactions
Through September 30, 1997, UDLP contracted with FMC for various
administrative and support services. These services included computer services,
systems and programming, data communications, employee relocation support,
payroll processing, insurance and general management support. During the nine
months ended September 30, 1997, UDLP paid $22.3 million to FMC for their
support.
UDLP also leased office and manufacturing facilities in San Jose,
California from FMC. Under the lease agreement monthly rent payments were
comprised of fixed base rent plus depreciation on the facilities. During the
nine months ended September 30, 1997, UDLP incurred rent amounting to $2.6
million under this lease.
Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5
million, which was included in the transaction costs for advisory services
related to the placement of the Senior and Senior Subordinated financing.
Additionally, during 1998 Carlyle provided consulting assistance in development
of management operating policies and procedures, for which the Company incurred
a charge to operations of $2.0 million. The management agreement between the
Company and Carlyle requires an annual fee of $2.0 million for various
management services. During the three months ended December 31, 1997 and the
years ended December 31, 1998 and 1999, the Company recorded $0.5 million, $2.0
million and $2.0 million, respectively, of charges relating to these services.
15. Restructuring
During the third quarter of 1998, the Company approved a restructuring plan
designed to rationalize production and lower costs at the Armament Systems
Division's Fridley, Minnesota facility. The plan calls for shifting a
significant portion of production and final assembly to other Company sites and
outsourcing certain other operations. In 1998 the Company recorded a charge of
$36.2 million for estimated employee termination expenses, acceleration of
recognition for benefit costs that were curtailed, and charges for impaired
assets. This charge will not
<PAGE>
United Defense Industries, Inc.
Notes to Consolidated Financial Statements (continued)
significantly impact operating funds as it mostly represents either asset write-
offs or costs that will be provided for out of an overfunded pension plan. There
were no adjustments to the recorded provisions during 1999. Remaining accrued
expenses are $ 1.6 million at December 31, 1999. The Company anticipates the
restructuring activity will be complete in the third quarter 2000 with the final
relocation of production to another site.
16. Employees' Thrift Plan
Substantially all of the Company's employees are eligible to participate in
defined contribution savings plans designed to comply with the requirements of
the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k)
of the Internal Revenue Code. Charges against income for matching contributions
to the plans were $7.1 million, $1.4 million, $8.1 million, and $8.1 million,
in the nine months ended September 30, 1997, the three months ended December 31,
1997, and the years ended December 31, 1998 and 1999, respectively.
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
ITEM 10: Directors and Executive Officers
The following table sets forth certain information with respect to the
members of the Board of Directors and the executive officers of the Company.
Executive officers of the Company are chosen by the Board of Directors and serve
at its discretion. The Board of Directors maintains an Executive Committee, a
Compensation Committee, and an Audit and Ethics Committee. Bill Conway and Allan
Holt serve as President and Chairman, respectively, of Iron Horse; and Peter
Clare, Daniel D'Aniello and David Rubenstein each serve as Vice Presidents of
Iron Horse. Messrs. D'Aniello and Rubenstein have been Managing Directors of The
Carlyle Group for the past six years. Officers of Iron Horse receive no
compensation for their position.
<TABLE>
<CAPTION>
Years
Name/1/ Position Age with Co./2/
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William E. Conway, Jr. Chairman 50 ------
- ---------------------------------------------------------------------------------------------------------------------------
Frank C. Carlucci Director 69 ------
- ---------------------------------------------------------------------------------------------------------------------------
Peter J. Clare Director 34 ------
- ---------------------------------------------------------------------------------------------------------------------------
Allan M. Holt Director 48 ------
- ---------------------------------------------------------------------------------------------------------------------------
Robert M. Kimmitt Director 52 ------
- ---------------------------------------------------------------------------------------------------------------------------
J.H. Binford Peay, III Director 59 ------
- ---------------------------------------------------------------------------------------------------------------------------
John M. Shalikashvili Director 63 ------
- ---------------------------------------------------------------------------------------------------------------------------
Thomas W. Rabaut Director, President, Chief Executive Officer 51 22
- ---------------------------------------------------------------------------------------------------------------------------
Francis Raborn Director, Vice President & Chief Financial Officer 56 22
- ---------------------------------------------------------------------------------------------------------------------------
David V. Kolovat Vice President, General Counsel & Secretary 55 11
- ---------------------------------------------------------------------------------------------------------------------------
Arthur L. Roberts Vice President, General Manager-International Division 59 32
- ---------------------------------------------------------------------------------------------------------------------------
Frederick M. Strader Vice President, General Manager-Armament Systems Div. 47 19
- ---------------------------------------------------------------------------------------------------------------------------
Dennis A. Wagner, III Vice President, Business Development & Marketing 49 18
- ---------------------------------------------------------------------------------------------------------------------------
Peter C. Woglom Vice President, General Manager-Ground Systems Division 55 26
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
William E. Conway, Jr. was elected as a Director of the Company in 1997. He
has been a Managing Director of The Carlyle Group, a Washington, DC-based global
investment firm, since 1987. Mr. Conway was Senior Vice President and Chief
Financial Officer of MCI Communications Corporation from 1984 until 1987, and
was a Vice President and Treasurer of MCI from 1981 to 1984. Mr. Conway
presently serves on the Board of Directors of Nextel Communications, Inc.,
Global Crossing Ltd., and several privately held companies.
Frank C. Carlucci was elected as a Director of the Company in 1997. He is
Chairman of The Carlyle Group, a Washington, DC-based global investment firm.
Prior to joining The Carlyle Group in 1989, Mr. Carlucci served as Secretary of
Defense from 1987-1989. Previously, he had served as President Reagan's National
Security Advisor in 1987. Mr. Carlucci serves on the following boards: Ashland,
Inc.; IRI International Corporation; Kaman Corporation; Neurogen Corporation;
Nortel Networks; The Quaker Oats Company; SunResorts, Ltd., NV; Texas
Biotechnology Corporation; Pharmacia & Upjohn, Inc., Westinghouse Electric
Corporation; and the Board of Trustees for the RAND Corporation and the Advisory
Committee of East New York Savings Bank.
________________________
/1/ Prior to the Acquisition, Allan M. Holt was the sole director and President
of the Company. Other directors and officers listed above were elected following
the Acquisition.
/2/ Includes the Company and its predecessors.
<PAGE>
Peter J. Clare was elected as a Director of the Company in 1997. He is
currently a Managing Director with The Carlyle Group, a Washington, DC-based
global investment firm, which he joined in 1992. Mr. Clare was previously with
First City Capital, a private investment group. From 1987 to 1989, he worked in
the mergers and acquisitions and merchant banking groups at Prudential-Bache.
Mr. Clare currently serves on the boards of several privately-held companies.
Allan M. Holt Was elected as a Director of the Company in 1997. He is a
Managing Director of The Carlyle Group, a Washington, DC-based global investment
firm, which he joined in 1991. Mr. Holt was previously with Avenir Group, a
private investment and advisory group, and from 1984 to 1987 was Director of
Planning and Budgets at MCI Communications Corporation, which he joined in 1982.
Mr. Holt currently serves on the boards of several privately-held companies.
Robert M. Kimmitt was elected as a Director of the Company in 1998. He was
named Vice Chairman and Chief Operating Officer of Commerce One, Inc., an
e-commerce company headquartered in Walnut Creek, California in February 2000.
Previously, he was a partner in the law firm of Wilmer, Cutler and Pickering
from 1997 to 2000 and currrently serves as counsel to the firm. From 1993 to
1997 he was a Managing Director of Lehman Brothers. Mr. Kimmitt served as
American Ambassador to Germany from 1991 to 1993. Previously, he has served as
Under Secretary for Political Affairs, General Counsel to the Treasury
Department, and a member of the National Security Council Staff. Mr. Kimmitt
serves on the boards of Allianz Life Insurance Company of North America, Big
Flower Holdings, Inc., Mannesmann AG and Siemans AG, as well as numerous
non-profit boards.
J. H. Binford Peay, III was elected as a Director of the Company in 1997.
General Peay is a career U.S. Army officer who attained the rank of General and
retired from the Army on October 1, 1997. He is the former Commander-In-Chief
of the U.S. Central Command (1994-1997), and also served as Vice Chief of Staff,
United States Army (1993-1994). Prior to serving as Vice Chief of Staff, he was
Deputy Chief of Staff for Operations and Plans, Department of the Army and
Senior Army Member, U.S. Military Committee, United Nations in Washington, DC
(1991-1993), and was Commanding General, 101/st/ Airborne Division (Air Assault)
at Ft. Campbell, Kentucky (1989 to 1991). General Peay serves as a Director of
MPRI, Trustee of George C. Marshall Foundation and a Trustee of Virginia
Military Institute Foundation.
John M. Shalikashvili was elected as Director of the Company in June 1998.
He currently is a visiting professor to the Center for International Security at
Stanford University. Previously, General Shalikashvili was a career U.S. Army
officer who attained the rank of General and retired from the Army in September
1997. He was appointed the 13/th/ Chairman of the Joints Chiefs of Staff on
October 25, 1993. Prior major commands were Supreme Allied Commander, Europe
(SACEUR) and Commander-In-Chief, United States European Command, Commander
Operation PROVIDE COMFORT (the relief operation that returned hundreds of
thousands of Kurdish refugees to Northern Iraq), Deputy Commander-In-Chief,
United States Army, Europe and Seventh Army, and Commander of the 9/th/ Infantry
Division (Motorized). The General was born in Warsaw, Poland on June 27, 1936.
General Shalikashvili serves on the board of L3 Communications Corporation, the
Frank Russell Trust Company, and Plug Power, Inc.
Thomas W. Rabaut has been President and Chief Executive Officer of UDLP
since its formation in 1994. Before joining UDLP, Mr. Rabaut worked at FMC since
1977 and held several executive positions, including General Manager of FMC's
Steel Products Division from 1986 to 1988,
<PAGE>
Operations Director and then Vice President and General Manager of FMC's Ground
Systems Division from 1988 to 1993, and General Manager of FMC's Defense Systems
Group, overseeing operations in the U.S., Turkey, Pakistan, and Saudi Arabia for
U.S. and allied armies, navies, and marines from 1993 to 1994. In 1994, he was
also elected Vice President of FMC. Mr. Rabaut graduated from the U.S. Military
Academy at West Point and from the Harvard Business School.
Francis Raborn was elected as a Director of the Company in 1997. He has
been Vice President and Chief Financial Officer of UDLP since its formation in
1994, with responsibility for financial, contract, administrative and government
compliance matters. Mr. Raborn joined FMC in 1977, and held a variety of
financial and accounting positions, including Controller of FMC's Defense
Systems Group from 1985 to 1993, and Controller of FMC's Special Products Group
from 1979 to 1985. Mr. Raborn received a B.S. in Economics from the University
of Pennsylvania's Wharton School and an MBA from UCLA.
David V. Kolovat has been Vice President and General Counsel of UDLP since
its formation in 1994. He has also served as FMC's Associate General Counsel in
charge of defense business legal work from 1988 until consummation of the
Acquisition. Mr. Kolovat served as Vice President and General Counsel of
Premisys, Inc., from 1986 to 1988, during which Premisys was acquired by Pacific
Telesis Corporation, and from 1984 to 1986 as Vice President and General Counsel
of Robot Defense Systems, Inc. Mr. Kolovat received his undergraduate degree
from the University of Iowa, and his law degree from Stanford Law School.
Arthur L. Roberts has been Vice President and General Manager-International
Division of UDLP since its formation in 1994. His responsibilities include
management of joint ventures in Turkey and Saudi Arabia and development of new
co-production programs. Prior to joining UDLP, Mr. Roberts was General Manager
of FMC's Defense Systems International Division since 1993. Mr. Roberts held a
number of positions at FMC since 1967, including management of the Turkey joint
venture program from its initial proposal in 1988 through 1992. Mr. Roberts
holds a Bachelor's Degree in Mechanical Engineering from Yale University and an
MBA from Harvard Business School.
Frederick M. Strader has been Vice President and General Manager-Armament
Systems Division of UDLP since May 1994. Prior to joining UDLP, Mr. Strader was
Division Manager of FMC's Agricultural Machinery Division from October 1992 to
May 1994, and Manager of FMC's Strategic Planning Group from September 1991 to
October 1992. Prior thereto, he held a number of operations, planning and
financial positions at the Steel Products Division of FMC. Mr. Strader received
his BA Degree from Ripon College and his MBA Degree from the Wharton School at
the University of Pennsylvania.
Dennis A. Wagner, III has been Vice President, Business Development and
Marketing of UDLP since its formation in 1994 with responsibility for the
development and coordination of world-wide strategies for the design,
manufacture, and sale of combat vehicles. Mr. Wagner joined FMC's Defense
Systems Group in 1982 and held a number of marketing and management positions,
including Division General Manager of FMC's Steel Products Division from 1989 to
1994 and Program Director for the M113 family of vehicles from 1987 to 1989. Mr.
Wagner received a BS in General Engineering from the U.S. Military Academy and
an MBA in Finance from the University of Detroit.
Peter C. Woglom has been Vice President and General Manager-Ground Systems
Division of UDLP since 1994. Prior thereto, he held a number of line and
executive positions at FMC after joining FMC in 1973, including Vice President
and General Manager of FMC's Ground Systems Division
<PAGE>
from 1993 to 1994, and Vice President and Director, Business Strategies and
Initiatives for FMC's Defense Systems Group from 1990 to 1993. Mr. Woglom
received BSCE and Master of Engineering Degrees from Cornell University and an
MBA from the University of Pittsburgh.
<PAGE>
ITEM 11: Executive Compensation
The following table sets forth information with respect to the compensation
paid by the Company for services rendered for the years ended December 31, 1999,
1998 and 1997 to the Chief Executive Officer and to each of the four other most
highly compensated executive officers of the Company (the "Named Executive
Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
--------------------------------------- ----------------------------------------------
Awards Payouts
----------------------- -------------------
Other Restricted Securities All Other
Name and Annual Stock Underlying LTIP Compen-
Principal Salary Bonus Compen- Award(s) Options Payouts sation
Position Year ($) ($) sation ($)/1/ ($)/2/ (#) ($) ($)/3/
- --------------------- ------- -------- ------- -------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Rabaut 1999 364,167 421,341 0 0 0 0 40,094
President & CEO 1998 363,197 393,082 0 0 200,000 0 0
1997 311,238 436,213 0 0 0 0 0
Peter C. Woglom 1999 245,587 237,728 0 0 0 0 20,895
Vice President, 1998 250,525 239,922 0 0 100,000 0 0
General Manager - 1997 226,578 139,028 0 0 0 0 0
Ground Systems
Francis Raborn 1999 210,600 206,177 0 0 0 0 20,161
Vice President & 1998 216,354 211,083 0 0 100,000 0 0
CFO 1997 163,120 123,237 0 0 0 0 0
Frederick M. Strader 1999 198,749 158,721 0 0 0 0 22,137
Vice President, 1998 213,456 168,420 0 0 100,000 0 0
General Manager - 1997 183,708 245,195 0 0 0 0 0
Armament Systems
David V. Kolovat 1999 203,562 134,839 0 0 0 0 13,732
Vice President 1998 201,225 133,291 0 0 60,000 0 0
General Counsel 1997 194,548 159,088 0 0 0 0 0
And Secretary
</TABLE>
______________________
/1/ Amounts of less than $50,000 or 10% of the Named Executive Officer's
compensation are excluded.
/2/ There are no Company Restricted Stock Awards.
/3/ Includes matching contributions under the Company's 401(k) Plan for salaried
employees for 1999.
<PAGE>
Directors Compensation
- ----------------------
The three outside directors (Messrs. Peay, Kimmitt and Shalikashvili) are
paid annual retainers of $25,000 for all services rendered. There are no other
fees paid for attendance at meetings, etc. These three directors may elect to
receive their annual retainer in cash, options to purchase Company stock, or a
combination. The Company does not maintain a medical, dental, or retirement
benefits plan for these directors. The remaining directors are employed either
by The Carlyle Group or the Company, and are not separately compensated for
their service as directors.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors is a standing
committee charged with the responsibilities, subject to full Board approval, of
establishing, periodically re-evaluating and (as appropriate) adjusting, and
administering policies concerning compensation of management personnel,
including the CEO and all of the Company's other executive officers. The
Compensation Committee was established in 1998 and Messrs. Peay and Clare serve
on the Committee. Mr. Clare is a member of The Carlyle Group, which is the
majority stockholder of the Company.
By virtue of his position as President and Chief Executive Officer, Mr.
Rabaut has been invited to attend all meetings of the Committee, but he is not a
voting member.
Retirement Plan
- ---------------
Each Named Executive Officer is covered under the UDLP Salaried Employees'
Retirement Plan (the "Pension Plan") and the UDLP Excess Pension Plan (the
"Excess Plan") described below. The following table shows the estimated annual
pension benefits under such plans for the specified compensation and years of
service.
A portion of the retirement benefits for service prior to 1986, computed
under the Pension Plan, is payable from annuity contracts maintained by Aetna
Life Insurance Company.
<TABLE>
<CAPTION>
Pension Plan Table
------------------
Estimated Annual Retirement Benefits
For years of Service Indicated
-----------------------------------------------------------------------------------------------------------
Final
Average
Earnings 15 Years 20 Years 25 Years 30 Years 35 Years
- --------------- ---------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$150,000 $ 31,270 $ 41,693 $ 52,117 $ 62,540 $ 72,963
250,000 53,770 71,693 89,617 107,540 125,463
350,000 76,270 101,693 127,117 152,540 177,963
450,000 98,770 131,693 164,617 197,540 230,463
550,000 121,270 161,693 202,117 242,540 282,963
650,000 143,770 191,693 239,617 287,540 335,463
900,000 200,020 266,693 333,367 400,040 466,713
</TABLE>
<PAGE>
Compensation included in the final average earnings for the pension benefit
computation includes base annual salary and annual bonuses, but excludes
payments for most other compensation. Unreduced retirement pension benefits are
calculated pursuant to the Pension Plan's benefit formula as an individual life
annuity payable at age 65. Benefits may also be payable as a joint and survivor
annuity or a level income option. Final average earnings in the above table
means the average of covered remuneration for the highest 60 consecutive
calendar months out of the 120 calendar months immediately preceding retirement.
Benefits applicable to a number of years of service or final average earnings
different from those in the above table are equal to the sum of (A) 1 percent of
allowable Social Security Covered Compensation ($33,066) for a participant
retiring at age 65 in 1999 times years of credited service and (B) 1.5 percent
of the difference between final average earnings and allowable Social Security
Covered Compensation times years of credited service. ERISA limits the annual
benefits that may be paid from a tax-qualified retirement plan. Accordingly, as
permitted by ERISA, the Company has adopted the excess plan to maintain total
benefits upon retirement at the levels shown in the table. Messrs. Rabaut,
Woglom, Strader, Raborn and Kolovat currently have 22, 26, 19, 22 and 11 years
of service under the Pension Plan, respectively.
The Company also maintains the Supplemental Thrift and Savings Plan
designed to provide select employees a benefit equal to the benefit the
participant would receive under the 401(k) plan if the Code and such plan did
not require the exclusion of compensation above a certain level. All Named
Executive Officers are eligible to participate in the Supplemental Thrift and
Savings Plan.
Severance Arrangements
- ----------------------
In 1999, the Company entered into executive compensation agreements with
certain management employees, including each Named Executive Officer. These
agreements generally provide that in the event the executive's employment is
terminated by the company other than for "cause" or by the executive with "good
reason" (each as defined therein), including an Acquisition or Merger, the
executive will be entitled to (i) a payment equal to a multiple (ranging from
one to three) of the executive's base pay and target bonus; (ii) Company-paid
outplacement services; and (iii) the right to continue to participate in the
Company's health, life and accidental death and dismemberment and long-term
disability benefits plan for one year to three years at the rates in effect for
active employees.
The Company also maintains a severance plan that generally covers most
salaried and non-union hourly employees, and provides severance payments in the
event of the employee's involuntary termination of employment due to a reduction
in force. Severance payments are calculated as a percentage (up to 100% maximum)
of base pay.
Stock Option Plan
- -----------------
The Company adopted an option plan for key employees (including the Named
Executive Officers) of the Company, pursuant to which options to purchase an
aggregate of approximately 8% of the Company's fully-diluted common stock at the
Closing Date were granted, subject to vesting requirements based on performance
and/or length of service after the options were granted. None of the Named
Executive Officers received option grants in 1999.
<PAGE>
AGGREGATED OPTIONS EXERCISED IN 1999
------------------------------------
Shown below is information with respect to options to purchase the
Company's common stock awarded to the Named Executive Officers and the value and
number of unexercised options held at December 31, 1999 by such Named Executive
Officers.
<TABLE>
<CAPTION>
Aggregated Options Exercised in 1999
And Option Values at 12/31/99
- -------------------------------------------------------------------------------------------------------------------
|
Shares Number of Securities |
Acquired on Value Underlying Unexercised | Value of Unexercised
Name Exercise Realized Options | Options *
- -------------- -------------- -------- -----------------------------------|------------------------------
|
Exercisable Unexercisable | Exercisable Unexercisable
----------- ------------- | ----------- -------------
<S> <C> <C> <C> <C> | <C> <C>
TW Rabaut 0 0 50,000 150,000 | $500,000 $1,500,000
|
PC Woglom 0 0 30,000 70,000 | $300,000 $ 700,000
|
FM Strader 0 0 30,000 70,000 | $300,000 $ 700,000
|
F Raborn 0 0 30,000 70,000 | $300,000 $ 700,000
|
DV Kolovat 0 0 18,000 42,000 | $180,000 $ 420,000
</TABLE>
* The value of the unexercised options is based on an internal valuation
prepared by the Company in 1999 of $20 per share.
<PAGE>
Item 12: Principal Stockholders
The following table sets forth certain information regarding the beneficial
ownership of the common stock of the Company by each person known by the Company
to be the owner of 5% or more of the common stock of the Company, by each person
who is a Director or Named Executive Officer of the Company and by all Directors
and Executive Officers of the Company as a group:
Percentage of All
Beneficial Owner/(1)/ Number of Outstanding
Shares Shares
TCG Holdings, L.L.C. /(2)(3)/ 17,300,000 96%
William E. Conway, Jr. (3)(5) 100,000 *
Allan M. Holt (3)(5) 25,000 *
Peter J. Clare (3)(5) 20,000 *
Frank C. Carlucci (3)(5) 20,000 *
Robert M. Kimmitt (4 5,000 *
J. H. Binford Peay, III (4) 0 *
John M. Shalikashvili (4) 0 *
Thomas W. Rabaut (4) 10,000 *
Francis Raborn (4) 75,000 *
David V. Kolovat (4) 31,428 *
Arthur L. Roberts (4) 34,000 *
Frederick M. Strader (4) 20,000 *
Dennis A. Wagner, III (4) 5,000 *
Peter C. Woglom (4) 10,000 *
All Directors and Executive Officers
as a Group (14) 355,428 2%
_____________________________
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
Except as otherwise indicated, each beneficial owner has the sole power to vote,
as applicable, and to dispose of all Units owned by such beneficial owner.
(2) Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners
III, L.P., a Delaware limited partnership, Carlyle International Partners II,
L.P., a Cayman Islands limited partnership, Carlyle International Partners III,
L.P., a Cayman Islands limited partnership, and certain additional partnerships
formed by Carlyle (collectively, the "Investment Partnerships") and certain
investors with respect to which TC Group, L.L.C. or an affiliate exercises
investment discretion and management constitute all of the members of Iron
Horse. TC Group, L.L.C. is the sole general partner of the Investment
Partnerships, and TCG Holdings, L.L.C., a Delaware limited liability company, is
the sole managing member of TC Group, L.L.C. William E. Conway, Jr., Daniel
A.D'Aniello, and David M. Rubenstein, as the managing members of TCG Holdings,
L.L.C. may be deemed to share beneficial ownership of the shares shown as
beneficially owned by TCG Holdings, L.L.C. Such persons disclaim such beneficial
ownership.
(3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania
Avenue, NW, Washington, DC 20004.
(4) The address of such person is c/o United Defense Industries, Inc., 1525
Wilson Boulevard, Suite 700, Arlington, Virginia 22209-2411.
(5) Individual also owns an interest in Iron Horse through Carlyle - UDLP
Partners, L.P.
*Denotes less than 1% beneficial ownership.
<PAGE>
ITEM 13. Certain Transactions
Concurrently with the closing of the acquisition, the Company entered into
a management agreement (the "Management Agreement") with TCG Holdings, L.L.C.
(or another affiliate of Carlyle) for certain management and financial advisory
services and oversight to be provided to the Company and its subsidiaries. The
Management Agreement provides for the payment to Carlyle of an annual management
fee of $2.0 million.
<PAGE>
ITEM 14. Exhibits and Financial Data Schedule
(a) The index of the financial statements has been included with Item 8.
(b) Reports on Form 8-K filed in the fourth quarter of 1999
None.
(c) Index of Exhibits. See below.
(d) Financial Statement Schedules.
None required.
EXHIBIT INDEX
Exhibit Description
-----------
Number
- -----
+2.1 Purchase Agreement dated as of August 25, 1997 among FMC Corporation,
Harsco Corporation, Harsco UDLP Corporation and Iron Horse Acquisition
Corp. (a copy of the schedules to this agreement will be furnished
supplementally upon request of the Commission).
++2.2 Supplemental Agreement No. 1 to Purchase Agreement dated as of August
25, 1997 among FMC Corporation, Harsco Corporation, Harsco UDLP
Corporation and Iron Horse Acquisition Corp.
+3.1a Certificate of Incorporation of Iron Horse Acquisition Corp. (n/k/a)
United Defense Industries, Inc.
+3.1b Certificate of Amendment of Certificate of Incorporation Before
Payment of Any Part of the Capital of Iron Horse Acquisition Corp.
(n/k/a United Defense Industries, Inc.)
+3.1c Certificate of Amendment of the Certificate of Incorporation of United
Defense Industries, Inc.
++++3.1d Certificate of Amendment of the Certificate of Incorporation of United
Defense Industries, Inc.
+3.2 By-laws of United Defense Industries, Inc.
+3.3 Certificate of Incorporation of UDLP Holdings Corp.
+3.4 By-laws of UDLP Holdings Corp.
+3.5 Amended and Restated Agreement of Limited Partnership of United
Defense, L.P.
+3.6 Certificate of Amendment to Certificate of Limited Partnership of
United Defense, L.P.
+3.7 Certificate of Formation of Iron Horse Investors, L.L.C.
+3.8 Limited Liability Company Agreement of Iron Horse Investors, L.L.C.
+4.1 Indenture dated as of October 6, 1997 among United Defense Industries,
Inc., United Defense, L.P., UDLP Holdings Corp. and Norwest Bank
Minnesota, National Association
+4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2007
(included in Exhibit 4.1 hereto)
+4.3 Purchase Agreement dated October 1, 1997 among United Defense
Industries, Inc., UDLP Holdings Corp., Iron Horse Investors, L.L.C.,
United Defense, L.P., Lehman Brothers Inc., BT Alex. Brown
Incorporated and Chase Securities Inc.
+4.4 Registration Rights Agreement dated as of October 6, 1997 among United
Defense Industries, Inc., United Defense, L.P., UDLP Holdings Corp.,
Iron Horse Investors, L.L.C., Lehman Brothers Inc., BT Alex. Brown
Incorporated and Chase Securities Inc.
++4.5 Credit Agreement dated as of October 6, 1997 among Iron Horse
Investors, L.L.C., United Defense Industries, Inc., various lending
institutions party thereto, Citicorp USA, Inc. and Lehman Commercial
Paper Inc. as Documentation Agents, and Bankers Trust Company as
Administrative Agent and as Syndication Agent
<PAGE>
++++4.7 Form of Stockholders Agreement, by and among Iron Horse Investors,
L.L.C., United Defense Industries, Inc. and each other holder of
Common Stock.
++++4.8 Stockholders Agreement, dated as of July 22, 1998, by and between
Iron Horse Investors, L.L.C., United Defense Industries, Inc., the
UDLP Non-Qualified Trust and United Defense, L.P.
++++4.9 UDLP Amended and Restated Supplemental Retirement and Savings Plan.
(1)
++++4.10 United Defense Stock Option Plan. (1)
++++4.11 Form of Option Contract. (1)
++++4.12 United Defense Industries, Inc. Equity Purchase Plan. (1)
++10.1 Lease Agreement dated as of June 1, 1994 among Calhoun Economic
Development Council and United Defense, L.P.
*10.2 Facilities use agreement number M67004-99-C0022 dated April 12, 1999
among United Defense, L.P. and the Marine Corps Logistics Base,
Albany, Georgia for the use of the government owned property located
at Building 1121, Bay 4 and rail sidings, and associated maintenance
service agreement.
++10.3 Sub-Lease Agreement among the Louisville/Jefferson County
Development Authority, Inc. and United Defense, L.P., as amended by
that certain First Amendment to Sublease of Real and Personal
Property Agreement among the Louisville/Jefferson County Development
Authority, Inc. and United Defense, L.P.
++10.4 Facilities contract number N00024-93-E-8521, dated November 16, 1992
among United Defense, L.P., Armament Systems Divisions and the U.S.
Government Naval Sea Systems Command for the use of the government
owned facility located at 4800 East River Road, Minneapolis, MN
55459.
++10.5 Lease Agreement dated January 22, 1996 among Lewis F. Holmes III and
United Defense, L.P.
++10.6 Lease Agreement dated November 1, 1993 among Brier Hill Steel
Company, Inc. and Harsco Corporation, as amended by that certain
Lease Novation Agreement among Harsco Corporation, Brier Hill Steel
Company, Inc. and United Defense, L.P. and by that certain Lease
Modification dated June 17, 1996 among United Defense, L.P. and
Brier Hill Steel Company, Inc.
*10.7 Lease Agreements dated April 1999 among ATP Associates L.P. and
United Defense L.P. (Buildings A and C).
+10.11 Transition Services Agreement dated as of October 6, 1997 among FMC
Corporation, United Defense, L.P. and United Defense Industries,
Inc.
+10.12 Technology and Environmental Services Agreement dated as of October
6, 1997 among FMC Corporation and United Defense Industries, Inc.
+10.13 Amended and Restated Lease Agreement dated as of October 6, 1997
among FMC Corporation and United Defense, L.P.
+10.14 Amended and Restated Harsco Intellectual Property Agreement dated as
of October 6, 1997 among Harsco Corporation and United Defense, L.P.
+10.15 Amended and Restated FMC Intellectual Property Agreement dated as of
October 6, 1997 among FMC Corporation and United Defense, L.P.
+10.16 Management Agreement dated October 6, 1997 among United Defense
Industries, Inc., United Defense, L.P. and TC Group Management,
L.L.C.
+++10.17 Professional Service Agreement with J.H. Binford Peay, III.
+++10.18 Professional Service Agreement with John M. Shalikashvili.
+++++10.19 Professional Service Agreement with Robert M. Kimmitt.
**10.20 Executive Compensation Agreement with Thomas W. Rabaut.
**10.22 Executive Compensation Agreement with Frederick M. Strader.
**10.23 Executive Compensation Agreement with Peter C. Woglom.
<PAGE>
**10.24 Executive Compensation Agreement with David V. Kolovat.
**10.25 Executive Compensation Agreement with Francis Raborn.
**10.26 Executive Compensation Agreement with Dennis A. Wagner, III.
*21.1 Subsidiaries of United Defense Industries, Inc.
*23.1 Consent of Ernst & Young LLP, Independent Auditors
*27.1 Financial Data Schedule
* Filed herewith.
** Incorporated by reference to the identical exhibit number in the
Company's Report on Form 10-Q for the quarter ended June 30, 1999
+ Incorporated by reference to the identical exhibit number in the
Company's Registration Statement on Form S-4 (333-43619) filed with the
Securities and Exchange Commission on December 22, 1997.
++ Incorporated by reference to the identical exhibit number in the
Company's Amendment No. 1 to Form S-4 (333-43619) filed with the
Securities and Exchange Commission February 6, 1998.
+++ Incorporated by reference to exhibits to the Company's Report on Form
10-Q for the quarter ended June 30, 1998.
++++ Incorporated by reference to the identical exhibit number in the
Company's Registration Statement on Form S-8 (333-60207) filed with the
Securities and Exchange Commission on July 30, 1998.
+++++ Incorporated by reference to the identical exhibit number in the
Company's Report on Form 10-K for the year ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant and each Co-Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Francis Raborn
------------------
Francis Raborn
Chief Financial Officer and Principal
Financial and Accounting Officer of the
Registrant and each Co-Registrant
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and each
Co-Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Thomas W. Rabaut President, Chief Executive February 18, 2000
--------------------
Thomas W. Rabaut Officer and Director of United
Defense Industries, Inc. ("UDI")
and UDLP Holdings Corp.
(for UDLP Holdings Corp.
itself and as the corporate
general partner of United
Defense, L.P.)
/s/ Francis Raborn Director of UDI and UDLP February 18, 2000
-------------------
Francis Raborn Holdings Corp. (for UDLP
Holdings Corp. itself and as
the corporate general
partner of United Defense, L.P.)
/s/ William E. Conway, Jr. Chairman of the Board of UDI February 18, 2000
--------------------------
William E. Conway, Jr.
/s/ Frank C. Carlucci Director of UDI February 18, 2000
----------------------
Frank C. Carlucci
/s/ Peter J. Clare Director of UDI February 18, 2000
-------------------
Peter J. Clare
/s/ Allan M. Holt Director of UDI and Chairman February 18, 2000
------------------
Allan M. Holt of Iron Horse Investors, L.L.C.
/s/ Robert M. Kimmitt Director of UDI February 18, 2000
----------------------
Robert M. Kimmitt
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ John M. Shalikashvili Director of UDI February 18, 2000
---------------------------
John M. Shalikashvili
/s/ J. H. Binford Peay, III Director of UDI February 18, 2000
---------------------------
J.H. Binford Peay, III
/s/ David V. Kolovat Director of UDLP February 18, 2000
--------------------
David V. Kolovat Holdings Corp. (for UDLP
Holdings Corp. itself and as
the corporate general partner
of United Defense, L.P.)
/s/ Robert N. Sankovich Director of UDLP February 18, 2000
-----------------------
Robert N. Sankovich Holdings Corp. (for UDLP
Holdings Corp. itself and as
the corporate general partner
of United Defense, L.P.)
</TABLE>
<PAGE>
Exhibit 10.2(a)
FACILITIES USE AGREEMENT
This Facilities Use Agreement Number M67004-99-C-0022, (the "Agreement") is
made and entered into as of this 12th day of April, 1999 by and between the
Marine Corps Logistics Base, Albany, Georgia (the "Government") and United
Defense LP (the "Contractor") (hereinafter collectively referred to as the
"Parties").
RECITALS
WHEREAS, the Government is the owner of certain real property located in
the County of Dougherty, State of Georgia, more particularly described in
Schedule A, attached hereto and incorporated herein by reference (the
"Property"): and
WHEREAS, the Government desires to provide the Property to the Contractor,
and the Contractor desires to use the Property for the purpose of performing
services for the Government in connection with the Amphibious Assault Vehicle
(AAV) Reliability, Maintainability, Sustainability/Rebuild to Standard program;
and
WHEREAS, providing the Property will facilitate the Government's
procurement of essential services and promote the national defense; and
WHEREAS, providing the Property will support the Government's industrial
preparedness programs and is in the public interest,
NOW THEREFORE, in consideration of the mutual promises and conditions set
forth herein, the Government and the Contractor hereby agree as follows:
I. PROVISION OF PROPERTY
---------------------
A. Provision. The Government hereby provides the Property to the
---------
Contractor and the Contractor hereby agrees to use the Property in
accordance with the terms and conditions set forth in this Agreement.
B. Use of Property. The Contractor is authorized to occupy and use the
---------------
Property in performance of the requirements in Contract M67854-98-C-
2075, which was awarded by the Marine Corps Systems Command (the
Contract"), and for such other uses as authorized by the Government.
C. Term, Option to Extend, and Termination. Notwithstanding any provision
---------------------------------------
to the contrary herein or in the FAR, the term of this Agreement shall
be for a period commencing on the date first written above and ending
on 31 December 2002. However, the parties hereto may by mutual written
<PAGE>
agreement, extend the use of the Property under this Agreement beyond
31 December 2002 to permit completion of the contract or subsequent
related contracts. Furthermore, notwithstanding the Government's
absolute right to terminate this Agreement at any time, the Government
will, to the extent practicable, provide the Contractor with 180 days
advance written notice prior to terminating this Agreement.
D. Rent. As provided in FAR 52.245-9(a), the Contractor shall have no
----
obligation to pay any rent to the Government provided the Contractor
only performs work under the Contract.
E. Annual Review. The Parties agree that they will periodically review
-------------
this Agreement (but not less than annually) to ensure that it
continues to meet their respective needs.
II. SPECIAL PROVISIONS.
------------------
A. Reasonable Access for Contractor. The Government agrees to permit the
--------------------------------
Contractor reasonable access to the Property and to place no
unreasonable encumbrance upon the free use and enjoyment of the
Property by the contractor's personnel, authorized visitors, or any
other individuals having a reasonable need to enter the Property.
B. Provision of Utilities and Support Services. The Government shall make
-------------------------------------------
available to the Contractor, on a reimbursable basis, the following
utilities and services in connection with the Contractor's use of the
Property, and the Parties hereto shall enter into a separate agreement
concerning the Government's provision of such utilities and services
and the Contractor's payment therefor.
Water Electricity
Sewage Natural Gas
Miscellaneous Maintenance Entomology Services
Building Maintenance Refuse Collection
Emergency Ambulance Service Hazardous Waste Disposal
In addition to the foregoing, the Government shall make available to
the Contractor, at no cost, the following services in connection with
the Contractor's use of the property:
Security Fire Protection
Safety Intra-base Mail
Guard Service (Gate)
C. Parking. The Government agrees to provide the Contractor with ten
-------
parking spaces adjacent to the Property as indicated in Schedule B. In
<PAGE>
addition, the Government will provide the Contractor with access to
additional parking in close proximity to the Property.
D. Installations, Arrangements, Rearrangements, Modifications and
--------------------------------------------------------------
Construction. The Contractor may, at its own expense, construct or
------------
install any fixed improvements, structural alterations or
modifications, or install such capital equipment on the Property as
may be necessary to perform its obligations under the Contract. This
shall include, but is not limited to, bringing utilities to the
Property and providing for the separate metering thereof, making
architectural/ structural, mechanical, electrical, or other
renovations or alterations to the Property; and, making improvements
(including stabilization and drainage) to any open storage areas. The
Parties acknowledge and understand, however, that at the expiration or
earlier termination of this Agreement, the Contractor may remove any
capital equipment that it provided and installed on the Property to
perform its obligations under the Contract. However, if the Contractor
removes any such capital equipment then the Contractor agrees to
restore that portion of the Property vacated by said equipment to a
condition such that the Property may once again be used for its
original purpose as a storage warehouse.
E. Periodic Inspections. The Government reserves the right to perform
--------------------
periodic preventive maintenance, fire protection and other inspections
of the Property. This shall include, but not be limited to, the
Government's right to perform environmental compliance and explosive
safety inspections.
F. Contracting Officer's Representative. The Contracting Officer shall
------------------------------------
designate in writing a Contracting Officer's Representative
(hereinafter "COR") to insure that the Parties comply with the terms
and conditions of this Agreement.
G. Condition of Property. The Government makes no warranty, express or
---------------------
implied, regarding the condition or fitness for use of the Property.
H. Compliance with Laws.
--------------------
1. General. The Contractor, at its own expense, shall conduct its
-------
activities on the Property in compliance with all applicable
laws, regulations, rules, orders, decrees, permits and
agreements, including without limitation those promulgated by the
Department of Defense or any division or related agency thereof,
and including without limitation those which relate to health,
safety, environmental protection, waste disposal, and water and
air quality with respect to the use of the Property and the
rights granted hereunder (all of which are hereinafter referred
to as the "Requirements"). Further, the Contractor
<PAGE>
shall conduct its activities in compliance with all requirements
to which the Government may be subject with respect to the
Property. The Parties agree that to the extent existing
Requirements are changed or new Requirements are imposed during
the term of this Agreement, both parties retain the right to seek
an equitable adjustment or other appropriate change under the
Contract as may be permitted by law.
2. Cooperation in Obtaining Permits. The Contractor shall, at its
--------------------------------
own expense, obtain any and all permits, licenses, and other
authorizing documents as may be necessary for the use and
possession of the Property, provided the Government cooperates
with and gives its best efforts to the Contractor to the extent
reasonably necessary for the contractor to obtain such permits,
licenses, and other authorizing documents. Hazardous waste may be
disposed of under MCLB Albany's Environmental Protection Agency
identification number on a reimbursable basis.
3. Government Disapproval of Contractor Actions. If the Government
--------------------------------------------
fails to reasonably approve or allow any action that the
Contractor has identified as reasonably required to meet its
obligations under this section then the Contractor shall be
relieved of its obligations pursuant to this section for such
action and any resulting conditions arising from the failure to
take such action.
I. Environmental Investigation and Remediation.
-------------------------------------------
1. Potential for Contamination and Intent to Apportion Liability.
-------------------------------------------------------------
The Parties acknowledge that environmental contamination may
currently exist on the Property and they hereby express their
mutual intent that the purpose of this section is to determine,
to the extent possible, the source(s) of any such contamination.
Specifically, while the Contractor has agreed herein to comply
with all applicable laws, the Parties agree that it is not their
intent to require the Contractor to clean up or otherwise
remediate any contamination which may exist on or in the vicinity
of the Property as of the effective date of this Agreement.
2. Contractor Responsibilities. The Contractor shall be responsible
---------------------------
for addressing and correcting (to the extent required by
applicable laws and regulations) any environmental pollution,
contamination and/or damage to the Property occurring after the
effective date of this Agreement and resulting from the
Contractor's use and/or possession of the Property on or after
the effective date of this Agreement, regardless of whether (a)
such pollution, contamination or damage is discovered before or
after the expiration or termination of this Agreement, or (b)
corrective or response actions continue or are required to begin
after the expiration or termination of this Agreement.
<PAGE>
The Contractor's obligations pursuant to this paragraph do not
extend to any acts of the United States or its agents. The
Contractor is not an agent of the United States for purposes of
this exclusion.
3. Environmental Baseline Surveys (EBS). The Government has, at its
------------------------------------
own expense, conducted an initial EBS that is appended to this
Agreement and incorporated herein as Schedule C. The Parties
acknowledge that this EBS accurately describes the environmental
condition of the Property as of the effective date of this
Agreement. At the conclusion of this Agreement, the Governmental
shall promptly, but no later than six months, conduct another EBS
at its own expense to determine the environmental condition of
the Property at the time the Contractor vacates the Property. A
copy of this final EBS will be furnished to the Contractor upon
completion of the survey.
4. Reservation of Rights. Notwithstanding any other provision of
---------------------
this Agreement, the Contractor and the Government hereby reserve
any and all rights and defenses available under law or any other
contract between the Parties that may apply to any liability to a
third party, including without limitation other federal, state or
local governmental agencies, relating to or arising from
environmental conditions existing on, emanating from, or relating
to the Property on the effective date of this Agreement. Nothing
in this Agreement shall be construed to abrogate any such rights
and defenses.
J. Environmental Indemnification. As of the effective date of this
-----------------------------
Agreement, the Contractor shall indemnify, defend and hold the
Government harmless against any and all claims, demands, judgments,
administrative actions, enforcement actions and lawsuits against the
Government alleging environmental pollution, contamination, damage to
property, personal injury or death and/or violation of any
environmental, health or safety law, regulation, permit, order, decree
or agreement resulting from, or attributable to, the actions or
omissions of the Contractor, its employees, agents, subcontractors and
suppliers, during all periods of time that the Contractor has the use
or possession of the property. The Contractor's obligation pursuant to
this section shall continue regardless of whether such allegations are
made before or after the expiration or termination of this Agreement.
The Contractor's obligations pursuant to this section do not extend to
acts of the United States or its agents. The Contractor is not an
agent of the United States for purposes of this exclusion. The
contractor shall be relieved of its obligations pursuant to this
section for any conditions arising from environmental compliance or
remediation activities which the Contractor has proposed to undertake
and the Government has unreasonably disapproved or disallowed to be
taken on the Property.
<PAGE>
K. Indemnification for Third Party Non-Environmental Claims. As of the
--------------------------------------------------------
effective date of this Agreement, the contractor shall indemnify,
defend and hold the Government harmless against all claims for
personal injury or death to any and all persons and for damage to
property of the Contractor or any and all other persons arising from
the Contractor's use or possession of this Property, provided that
indemnification for all claims involving environmental pollution or
contamination shall be governed by the section of this Agreement
titled "Environmental Indemnification."
III. MISCELLANEOUS PROVISIONS.
------------------------
A. Headings. The section headings of this Agreement are inserted for
--------
reference purposes only and do not affect the terms and provisions
hereof.
B. Industrial Mobilization. The Property shall not be subject to or be
-----------------------
made part of any industrial mobilization requirements planning unless
otherwise agreed to in writing by the Parties.
C. Notices. Except as otherwise provided in this Agreement, any notice
-------
required or permitted to be given hereunder shall be delivered
personally or sent by mail with postage prepaid to the following
addresses or to such other places as may be designated by the Parties
from time to time.
For the Contractor: For the Government:
Contracting Officer (Code 891)
Marine Corps Logistics Bases
P.O. Drawer 43019
Albany, Georgia 31704
D. Incorporation by Reference of FAR and DFARS Contract Clauses. This
------------------------------------------------------------
Agreement incorporates the following FAR and DFARS clauses by
reference, pursuant to FAR 52.252-03, with the same force and effect
as if they were given in full text.
<TABLE>
<CAPTION>
FAR REF NO. CLAUSE TITLE CLAUSE DATE
- ----------- ------------ -----------
<S> <C> <C>
52.203-1 Definitions OCT 1995
52.203-3 Gratuities APR 1984
52.203-5 Covenant Against Contingent Fees APR 1984
52.203-7 Anti-Kickback Procedures JUL 1995
52.211-15 Defense Priority and Allocation Requirements SEP 1990
52.215-2 Audit and Records - Negotiations AUG 1996
Alternate I (JAN 1997)
52.215-8 Order of Precedence - Uniform Contract Format OCT 1997
52.217-9 Option to Extend the Term of the Contract MAR 1989
52.222-3 Convict Labor AUG 1996
52-222-17 Labor Standards for Construction Work - FEB 1988
Facilities Contracts
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
52.288-5 Insurance - Work on a Gov't Installation JAN 1997
Workmen's Compensation - $100,00
Comp. Gen'l Liability - $ 500,000 pers. Injury
$1,000,000 prop. Damage
Comp. Auto Liability - $200,000 per person
$500,000 bodily injury
$ 20,000 prop. damage
52.232-21 Limitation of Cost (Facilities) APR 1984
52.233-1 Disputes-Alternate I (DEC 1991) OCT 1995
52.237-2 Protection of Government Buildings, APR 1984
Equipment and Vegetation
52.242-1 Notice of Intent to Disallow Costs APR 1984
52.242-13 Bankruptcy JUL 1995
52.242-16 Stop Work Order - Facilities AUG 1989
52-243-2 Changes - Cost-Reimbursement AUG 1987
Alternative IV (APR 1984)
52.245-1 Property Records APR 1984
52.245-8 Liability for the Facilities JAN 1997
52.245-9 Use and Charges APR 1984
52.245-11 Government Property (Facilities Use) APR 1984
52.246-10 Inspection of Facilities APR 1984
52.249-13 Failure to Perform APR 1984
52-249-1 Termination for Convenience of the APR 1984
Government (Services)
52-249-14 Excusable Delays APR 1984
52.252-2 Clauses Incorporated by Reference FEB 1992
<CAPTION>
DFARS REF NO. CLAUSE TITLE CLAUSE DATE
- ------------- ------------ -----------
<S> <C> <C>
252.301-7000 Contracting Officer's Representative DEC 1991
</TABLE>
E. Counterparts. This agreement may be signed in counterparts.
------------
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed by this Agreement as
of the date first set forth above.
FOR UNITED DEFENSE LP FOR MARINE CORPS LOGISTICS BASE
ALBANY, GEORGIA
By /s/ William Tileston By /s/ Larry P. Cole
-------------------------- --------------------------
William Tileston LARRY P. COLE
Colonel, U.S. Marine Corps
Title Division Controller Title Commanding Officer
arine Corps Base, Albany, GA
By /s/ B. L. Williams, Jr.
-------------------------
B. L. WILLIAMS, JR.
Colonel, U.S. Marine Corps
Title Program Manager, AAV
By /s/ Larry F. Pendley
-------------------------
LARRY F. PENDLEY
Title Contracting Officer (Code 891)
<PAGE>
Schedule A - Government Furnished Property
(As shown on attached map)
Building 1121, Bay 4 42,600 Square Feet
Rail Siding at Building 1,000 Linear Feet
Parking Spaces (10) Adjacent to Building
<PAGE>
Exhibit 10.2(b)
Memorandum of Agreement (MOA)
Between
United Defense LP
and the
Marine Corps Logistics Base
for
Installation Support Services
/s/ Gary C. McDonald /s/ L. P. Cole
- ------------------------------ ------------------------------
L. P. COLE
for United Defense LP Commanding Officer
Marine Corps Logistics Base
Albany, Georgia
<PAGE>
I. PURPOSE: This MOA establishes responsibilities of United Defense LP (UDLP)
-------
in reimbursing the Marine Corps Logistics Base, Albany, Georgia (Host) for
certain installation support services.
II. BACKGROUND: On 12 April 1999, the parties entered into Facilities Use
----------
Agreement in conjunction with Contract Number M67004-99-C-0022. Under that
agreement, the Government will provide warehouse space onboard the installation
for use by UDLP in order to carry out the contract for Amphibious Assault
Vehicle (AAV) Reliability, Maintainability, Sustainability/Rebuild. This
property is identified as Building 1121, Bay 4 and includes 42,600 square feet
of warehouse space.
III. CONDITIONS: The following support and services will be provided to UDLP
----------
on a reimbursable basis or as indicated.
1. Communications. The Host shall allow connection to the main telephone
line, which services the installation at no expense to UDLP. UDLP will be
financially responsible for all costs associated with telephone line
installations, connections and/or modifications to existing lines, hardware
(telephones, switchboard, modems, etc.), repair, maintenance, monthly service
fees and related charges to the commercial provider.
2. Custodial Services. The Host shall contract for janitorial services to be
performed in space occupied by UDLP such as administrative areas and restrooms.
UDLP will specify services to be performed in connection with the annual
custodial contract and will reimburse the installation for the annual contract
costs and any additional services requested from time to time.
3. Emergency Ambulance Services. The Host shall provide emergency medical
services on an as requested basis. UDLP will reimburse the Host for direct labor
and material costs.
4. Pest Control Services. The Host shall provide insect and rodent control
including but not limited to routine treatment of space assigned to UDLP. UDLP
will reimburse the Host for direct labor and materials costs.
5. Facilities Maintenance. The Host shall provide routine maintenance,
alterations and repair as well as all emergency repair services. UDLP will
reimburse the Host for direct labor and materials costs.
6. Hazardous Waste Disposal. The Host shall provide disposal of hazardous
waste. UDLP will reimburse the Host for labor and materials costs and any other
direct costs associated with disposal of hazardous waste.
7. Refuse Collection and Disposal. The Host shall provide services for
collection and transportation of refuse to authorized landfill sites. Pick-up
services are provided on a weekly basis. Bulk (trailer) refuse will be
authorized by telephone and dumped at currently established rates. UDLP will
place trash and garbage in designated receptacles
<PAGE>
and maintain the general appearance of area near receptacle. All refuse
collection and disposal services will be reimbursed by UDLP.
8. Utilities. The Host shall provide on a reimbursable basis the following
utilities for the UDLP occupied facilities: water, electricity, natural gas, and
sewage.
IV. RATES: Reimbursements are based on private party rates established
-----
annually. The following table provides current rates. UDLP will be given timely
notice of any changes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Description Unit Cost per Unit
----------- ---- -------------
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Water KGN $ .80
- ----------------------------------------------------------------------------------------
Electricity KWH $72.40
- ----------------------------------------------------------------------------------------
Natural Gas ACF $ 7.25
- ----------------------------------------------------------------------------------------
Sewage KGAL $ 1.65
- ----------------------------------------------------------------------------------------
Entomology Services Labor/Hour $25.50
Materials Actual Cost
- ----------------------------------------------------------------------------------------
Refuse Collection Dumpster $15.00
Cost per dump
- ----------------------------------------------------------------------------------------
Building and other Maintenance Labor/Hour $25.50
Materials Actual Cost
- ----------------------------------------------------------------------------------------
Emergency Ambulance Service As requested Actual Cost
- ----------------------------------------------------------------------------------------
Hazardous Waste Disposal As required Actual Cost
- ----------------------------------------------------------------------------------------
Custodial Services Contract $599.52/Month
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
V. ANNUAL ESTIMATE: Utilities usage (water, electricity, natural gas, and
---------------
sewage) have been tracked during the three-month period 12 April 999 to 12 July
1999. Reimbursable utility charges total $2,922.83. If utilities usage remains
constant at the rate of $2,922.83 per quarter, reimbursable utility charges
would total $11,691.32 per year. UDLP agrees to promptly pay for utilities and
all other services listed in this agreement for which it is billed.
VI. PAYMENT METHOD: Statements will be mailed to UDLP on a monthly basis
--------------
detailing expenses incurred during the preceding month. The Defense Finance and
Accounting Services (DFAS) handles all payment matters for the Host. Please
follow instructions sent with these monthly statements.
<PAGE>
VII. CERTIFICATION/COORDINATION: The parties of this MOA may propose amendments
--------------------------
to this agreement. When agreed upon, an amendment will be prepared by the
originator and approved by the original signatories or their designees.
Termination of this MOA can only be accomplished with the consent of all parties
of the agreement. The period of performance for this agreement is 12 April 1999
to 31 December 2002. Continued services after 31 December 2002 will be
identified, negotiated and contained in a new or modified MOA effective with
signatures from both parties.
<PAGE>
Exhibit 10.7(a)
LEASE
BY AND BETWEEN
ATP ASSOCIATES L.P.
a Delaware limited partnership, as Landlord
and
UNITED DEFENSE L.P.,
a Delaware limited partnership,
as Tenant
for
BUILDING A
<PAGE>
LEASE
(Building A)
This Lease, dated April ___,1999 for reference purposes only, is made by
and between ATP Associates L.P., a Delaware limited partnership ("Landlord"),
and United Defense L.P., a Delaware limited partnership ("Tenant").
Recitals
A. The Equitable Life Assurance Society of the United States("Equitable")
and FMC Corporation ("FMC") entered into a lease dated June 1, 1989 (the
"Original Lease"), for the Premises (as defined below);
B. On or about August 11, 1995, Landlord acquired the fee simple interest
in certain real property, including the Premises, from Equitable and succeeded
to the interest of Equitable as Landlord under the Lease;
C. Tenant is now occupying the Premises pursuant to the Original Lease,
as if the Original Lease had been assigned by FMC to Tenant; and
D. Landlord and Tenant have agreed to enter into this new Lease instead
of extending the Old Lease, and Tenant has agreed to assume the obligations
under the Original Lease as if the Original Lease had been assigned to Tenant
and the term extended.
Agreement
Now Therefore, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
ARTICLE 1
Definitions
1.1 Commencement Date. The term "Commencement Date" shall mean November 1,
1999.
1.2 Rent Start Date. The term "Rent Start Date" shall mean November 1,
1999 provided, however, that if the Landlord is unable to so deliver possession
of the Leased Premises to Tenant in the agreed condition on or before the
Commencement Date, rent shall not commence and Landlord shall not be in default
under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant
until the lapse of ninety (90) days after the Commencement Date.
1.3 Lease Term. The Lease Term shall commence on the Commencement Date and
shall continue until the fourth (4th) anniversary of the Rent Start Date (unless
the Lease Term is extended pursuant to paragraph 2.4 hereof).
1.4 Property. The term "Property" shall mean that real property shown on
the site plan attached hereto as Exhibit "A" and all improvements now or
hereafter located thereon, including, without limitation, the five (5) buildings
presently located thereon, the aggregate gross leaseable area of which is
approximately 295,271 square feet (the "Property Gross Leaseable Area"),
allocated among the five buildings as shown on the attached Exhibit "A";
provided, however, that Landlord may change the boundaries and composition of
the Property by removing or adding land and/or buildings and thereafter the term
"Property" shall refer to such real property so enlarged or reduced and the
amount of the "Property Gross Leaseable Area" shall be appropriately adjusted.
1.
<PAGE>
1.5 Premises. The term "Premises" shall mean the building structure
situated on the Property commonly known as Building A of Airport Technology
Park, 2890 De La Cruz Boulevard, Santa Clara, California, containing
approximately 68,708 square feet of gross leaseable area (the "Premises Gross
Leaseable Area") located as shown on Exhibit "A". Landlord and Tenant agree that
(i) all measurements of gross leaseable area contained in this lease are
conclusively agreed to be correct and binding upon the parties, even if a
subsequent measurement of any one of these areas determines that it is more or
less than the amount of area reflected in this Lease; and (ii) any such
subsequent determination that the area is more or less than shown in this Lease
shall not result in a change in any of the computations of rent, improvement
allowances, or other matters described in this Lease where gross leaseable area
is a factor.
1.6 Permitted Use. The term "Permitted Use" shall mean the use of the
Premises for (i) research and development, production, sales, and general
administrative offices and other legal uses incidental thereto, and (ii) any
other legal use first approved in writing by Landlord.
1.7 Tenant's Minimum Liability Insurance Coverage. The term "Tenant's
Minimum Liability Insurance Coverage" shall mean Two Million Five Hundred
Thousand Dollars ($2,500,000).
1.8 Tenant's Allocated Parking Stalls. The term "Tenant's Allocated
Parking Stalls" shall mean 267 parking stalls for the non-exclusive use of
Tenant.
1.9 Retained Real Estate Brokers. The term "Retained Real Estate Brokers"
shall mean Thomas Smith of CB Richard Ellis and Richard Kimball of Colliers
Parrish.
1.10 Address for Notices. The term "Address for Notices" shall mean
the following:
A. In the case of Landlord, such term shall mean c/o Menlo Equities
LLC, 525 University Avenue, Suite 100, Palo Alto, California 94301, Attention:
Henry D. Bullock/Richard J. Holmstrom.
B. In the case of Tenant, such term shall mean the address of the
Premises which is 2830 De La Cruz Boulevard, Santa Clara, California 95050.
1.11 Lease. The term "Lease" shall mean this printed lease, Exhibits "A"
(site plan), "B" (Approved Plans for Interior Improvements), "C" (Interior
Improvement Agreement), "D" (form of subordination agreement), all of which are
attached hereto and incorporated herein by this reference.
1.12 Building C Lease. The term "Building C Lease" shall mean that lease
dated as of April __, 1999 between Landlord and Tenant, pursuant to which Tenant
leases from Landlord that certain building identified as Building C on the site
plan attached hereto as Exhibit "A' and which contains approximately 86,785
square feet, the address of which is 2830 De La Cruz Boulevard, Santa Clara,
California.
1.13 Tenant's Allocated Share. The term "Tenant's Allocated Share" shall
mean one hundred percent (100%).
1.14 Continuing Tenant Default. A "Continuing Tenant Default" shall be
deemed to exist when an "Event of Tenant's Default" (as defined in paragraph
13.1) has occurred, and the underlying default or breach by Tenant of its
obligations which resulted in such Event of Tenant's Default has not been
completely cured.
1.15 Additional Definitions. As used in this Lease or any addendum or
amendment thereto, the following terms shall have the meanings set forth in
paragraph 15.12: "Agreed Interest Rate", "Common Area", "Law", "Leasehold
Improvements", "Lender", "Private Restrictions" and "Trade Fixtures".
2.
<PAGE>
ARTICLE 2
Demise And Acceptance
2.1 Demise of Premises. Landlord hereby leases to Tenant, and Tenant
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises together with (i) the non-exclusive right to use no more
than the number of Tenant's Allocated Parking Stalls within the Common Area
(subject to the limitations set forth in paragraph 4.7), and (ii) the non-
exclusive right to use the Common Area for ingress to and egress from the
Premises. Tenant's lease of the Premises shall be subject to (i) all Laws, (ii)
all Private Restrictions, easements, and other matters of public record, and
(iii) the reasonable and non-discriminatory rules and regulations from time to
time promulgated by Landlord pursuant to paragraph 4.6.
2.2 Delivery and Acceptance of Possession. Landlord shall deliver to
Tenant possession of the Premises on the Commencement Data in their presently
existing condition, broom clean. Tenant shall accept possession of the Premises
in its presently existing condition, "as-is" (except for latent defects in the
structural elements of the Premises), acknowledging that Tenant intends to do
renovation work and construct interior improvements pursuant to paragraph 2.3
hereof and the Interior Improvement Agreement attached as Exhibit "C".
2.3 Construction of Interior Improvements. Tenant shall construct certain
improvements for Tenant's use in the Premises pursuant to the terms of the
Interior Improvement Agreement executed concurrently with this Lease by Landlord
and Tenant and attached hereto an Exhibit "C".
2.4 Options to Extend Lease Term. Landlord hereby grants to Tenant one (1)
option (the "Option") to extend the Lease Term for a three (3) year period (the
"Option Term"), on the following terms and conditions:
A. Tenant must give Landlord notice in writing of its exercise of the
Option before the later to occur of (i) the two hundred fortieth (240th) day
before the date the initial Lease Term would and but for said exercise, or (ii)
the seventh (7th) day following the establishment of the fair market rent for
the Premises by appraisal pursuant to subparagraph 2.4F if such appraisal
process is commenced pursuant to subparagraphs 2.4E and 2.4F.
B. Tenant may not exercise the option at any time that either of the
following is true: (i) a Continuing Tenant Default exists under this Lease
(unless caused by a subtenant of the original Tenant under this Lease and such
original Tenant is using reasonable efforts to cause such default to be cured);
or (ii) a Continuing Tenant Default exists under the Building C Lease (unless
caused by a subtenant or assignee of the original Tenant under this Lease and
such original Tenant is using reasonable efforts to cause such default to be
cured) and the same person or entity is the owner of record of both the Premises
and the real property leased pursuant to the Building C Lease.
C. All terms and conditions of this Lease shall apply during the
Option Term, except that the Base Monthly Rent for the Option Term shall be
determined as provided in subparagraph 2.4D below.
D. The Base Monthly Rent for the Option Term with respect to the
Premises shall be the ninety-five percent (95%) of the fair market rent for the
Premises for the Option Term on the terms contained in this Lease as of the
commencement of the Option Term, determined pursuant to subparagraphs 2.4E and
2.4F. For purposes of this Lease, the term "fair market rent for the Premises"
shall mean the projected going market rent for the Premises as of the
commencement of the Option Term in question, including a provision for periodic
increases of such rent during the Option Term (which increases shall be
established as part of such fair market rent), taking into account the value of
all improvements in the Premises, regardless of whether made by Landlord or
Tenant (except for those Leasehold Improvements that Tenant has the right to
remove at the expiration of the Lease Term) but in no event shall fair market
rent be less than the rent in effect during the immediately prior period.
E. Tenant may not exercise the Option in question unless Tenant has
delivered to Landlord a written request (a "Rent Quote Request") that Landlord
state in writing Landlord's opinion of the fair market rent
3.
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for the Premises for the upcoming Option Term in question, which Rent Quote
Request may only be delivered and shall only be effective if delivered (i) no
sooner than fifteen (15) months before the expiration of the Lease Term, and
(ii) no later than thirteen (13) months prior to the expiration of the Lease
Term. After receipt of a Rent Quote Request and no later than twelve (12) months
prior to the expiration of the Lease Term, Landlord shall deliver to Tenant a
written statement setting forth Landlord's opinion of the fair market rent for
the Premises for the Option Term in question (a "Landlord's Rent Quote"). For a
period of thirty (30) days following delivery to Tenant of Landlord's Rent Quote
(the "Negotiation Period"), Landlord and Tenant shall confer to attempt to reach
agreement upon the fair market rent for the Premises for the Option Term in
question. If Landlord and Tenant are unable to reach agreement in writing within
the Negotiation Period, for purposes of establishing the Base Monthly Rent for
the Option Term in question, the fair market rent for the Premises shall be
deemed to be the amount stated in Landlord's Rent Quote unless Tenant delivers
to Landlord during the Negotiation Period a written notice which states the
following: (i) Tenant requires that the fair market rent for the Premises for
the option Term in question be established by the appraisal process described in
subparagraph 2.4F; and (ii) the name, address, and qualifications of the
appraiser selected by Tenant for purposes of the appraisal process described in
subparagraph 2.4F ("Tenant's Appraisal Demand"). If Tenant so timely delivers to
Landlord a Tenant's Appraisal Demand, the Base Monthly Rent for the Option Term
in question shall be established based on the result of the appraisal process
described in subparagraph 2.4F.
F. If Tenant delivers to Landlord a Tenant's Appraisal Demand during
the Negotiation Period, then the fair market rent for the Premises shall be
determined by three (3) real estate appraisers, all of whom shall be members of
the American Institute of Real Estate Appraisers with not less than five (5)
years experience appraising real property (other than residential or
agricultural property) located in Santa Clara County, California, in accordance
with the following procedures:
(1) One of the appraisers shall be the appraiser identified in
Tenant's Appraisal Demand. Within ten (10) days of receipt of Tenant's Appraisal
Demand, Landlord shall select its appraiser and notify Tenant, in writing, of
the name, address and qualifications of an appraiser selected by it. Failure by
Landlord to select a qualified appraiser within said ten (10) day period shall
be deemed a waiver of its right to select a second appraiser on its own behalf
and Tenant shall select a second appraiser on behalf of Landlord within five (5)
days after the expiration of said ten (10) day period. Within ten (10) days from
the date the second appraiser shall have been appointed, the two (2) appraisers
selected by the parties shall appoint a third appraiser. If the two appraisers
fail to select a third qualified appraiser, the third appraiser shall be
selected by the American Arbitration Association at the request of either party
or, if there is then no American Arbitration Association or if it refuses to
perform this function, then at the request of either Landlord or Tenant, the
third appraiser shall be appointed by the then Presiding Judge of the Superior
Court of the State of California for the County of Santa Clara.
(2) The three (3) appraisers so selected shall meet in San Jose,
California, not later than twenty (20) days following the selection of the third
appraiser. At said meeting the appraisers shall attempt to determine the fair
market rent for the Premises for the Option Term in question.
(3) If the appraisers are unable to complete their
determinations in one meeting, they may continue to consult at such times as
they deem necessary for a fifteen (15) day period from the date of their first
meeting, in an attempt to have at least two (2) of them agree. If, at the
initial meeting or at any time during said fifteen (15) day period, two (2) or
more of the appraisers agree on the fair market rent for the Premises, such
agreement shall be determinative and binding on the parties hereto, and the
agreeing appraisers shall, in simple letter form executed by the agreeing
appraisers, forthwith notify both Landlord and Tenant of the amount set by such
agreement.
(4) If two (2) or more appraisers do not agree within said
fifteen (15) day period as set forth above, then each appraiser shall, within
five (5) days after the expiration of said fifteen (15) day period, submit his
independent appraisal in simple letter form to Landlord and Tenant stating his
determination of the fair market rent for the Premises for the Option Term in
question. Landlord and Tenant shall then determine the fair market rent for the
Premises for the Option Term by determining the average of the fair market rent
set by each of the appraisers; provided, however, if the lowest appraisal is
less than eighty-five percent (85%) of the middle appraisal then such lowest
appraisal shall be disregarded, and/or if the highest appraisal is greater than
one hundred
4.
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fifteen percent (115%) of the middle appraisal then such highest appraisal shall
be disregarded. If any appraisal in disregarded, then the average shall be
determined by computing the average set by the other appraisals that have not
been disregarded. For purposes of determining the relative amount of the
appraisals to implement the provisions of this subparagraph requiring that an
appraisal be disregarded if it is too high or too low, the amount of an
appraisal that calls for periodic rent increases based upon an index (e.g., the
Consumer Price Index) shall be determined by assuming that such index will
increase at the same average annual rate during the option period in question
that such index increased on an average annual basis during the five (5) year
period preceding the commencement of the option period in question.
(5) Each party shall bear the fees and expenses of the
appraisers selected by or for it, and the fees and expenses of the third
appraiser shall be borne fifty percent (50%) by Landlord and fifty percent (50%)
by Tenant.
ARTICLE 3
Rent
3.1 Base Monthly Rent. Commencing on the Rent Start Date and continuing
thereafter throughout the initial Lease Term, Tenant shall pay to Landlord a
monthly rent (which rent is referred to as the "Base Monthly Rent"), which shall
be the following:
A. The Base Monthly Rent for the period beginning on the Rent Start
Date and ending on the last day of the twelfth (12th) month of the Lease Term is
Ninety-Eight Thousand Nine Hundred Forty Dollars ($98,940) (i.e., $1.44 per
square foot per month).
B. The Base Monthly Rent for the period beginning on the first day of
the thirteenth (13th) month of the Lease Term and ending on the last day of the
twenty-fourth (24th) month of the Lease Term is One Hundred Two Thousand Three
Hundred Seventy-Five Dollars ($102,375) (i.e., $1.49 per square foot per month).
C. The Base Monthly Rent for the period beginning an the first day of
the twenty-fifth (25th) month of the Lease Term and ending on the last day of
the thirty-sixth (36th) month of the Lease Term is One Hundred Five Thousand
Eight Hundred Ten Dollars ($105,810) (i.e., $1.54 per square foot per month).
D. The Base Monthly Rent for the period beginning on the first day of
the thirty-seventh (37th) month of the Lease Term and ending on the last day of
the forty-eighth (48th) month of the Lease Term is One Hundred Nine Thousand
Dollars Two Hundred Forty-Six Dollars ($109,246) (i.e., $1.59 per square foot
per month).
E. For purposes of applying the provisions of this paragraph 3.1, the
term "month of the Lease Term" shall mean that period which begins on that day
of the calendar month in question which corresponds to the Rent Start Date and
which continues for thirty (30) or thirty-one (31) days until the day of the
next calendar month which precedes the day in that calendar month which
corresponds to the Rent Start Date. By way of example only, if it is assumed
that the Rent Start Date is November 1, 1999, then for purposes of this
paragraph 3.1 (i) the first month of the Lease Term would commence November 1
and end on November 30, 1999.
3.2 Additional Rent. Commencing on the Rent Start Date and continuing
thereafter throughout the Lease Term, Tenant shall pay, as additional rent (the
"Additional Rent"), (i) Tenant's share of Common Operating Expenses as required
by paragraph 6.3, (ii) Tenant's share of Real Property Taxes as required by
paragraph 8.2, (iii) Landlord's share of the net consideration received by
Tenant upon certain assignments and sublettings as required by paragraph 14.1,
(iv) any late charges or interest due Landlord pursuant to paragraph 3.4, (v)
Tenant's share of the amortized cost of certain additional improvements as
provided in paragraph 5.4, and (vi) any other charges due Landlord pursuant to
this Lease.
5.
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3.3 Payment of Rent. All rent required to be paid in monthly installments
shall be paid in advance on the first day of each calendar month during the
Lease Term. All rent shall be paid in lawful money of the United States, without
any abatement, deduction or offset whatsoever (except as permitted by paragraphs
11.4 and 12.2), and without any prior demand therefor, to Landlord at its
address set forth above or at such other place as Landlord may designate from
time to time. Tenant's obligation to pay rent shall be prorated as of the Rent
Start Date and at expiration or earlier termination of the Lease Term such that
Tenant shall not be required to pay Base Monthly Rent or Additional Rent for any
period preceding the Rent Start Date or following the expiration or earlier
termination of the Lease Term (except in the case of a termination of this Lease
an a result of an Event of Tenant's Default).
3.4 Late Charge and Interest on Rent in Default. Tenant acknowledges that
the late payment by Tenant of any monthly installment of Base Monthly Rent or
any Additional Rent will cause Landlord to incur certain costs and expenses not
contemplated under this Lease, the exact amount of which are extremely difficult
or impractical to fix. Such costs and expenses will include, without limitation,
administration and collection costs and processing and accounting expenses.
Therefore, if any such Base Monthly Rent or Additional Rent is not received by
Landlord from Tenant within five (5) days after Landlord delivers written notice
to Tenant that such amount is delinquent, Tenant shall immediately pay to
Landlord a late charge equal to five percent (5%) of such delinquent rent.
Landlord and Tenant agree that this late charge represents a reasonable estimate
of such costs and expenses and is fair compensation to Landlord for its loss
suffered by Tenant's failure to make timely payment. In no event shall this
provision for a late charge be deemed to grant to Tenant a grace period or
extension of time within which to pay any rent or prevent Landlord from
exercising any right or remedy available to Landlord upon Tenant's failure to
pay any rent due under this Lease in a timely fashion, including the right to
terminate this Lease. If any rent remains delinquent for a period in excess of
thirty (30) days after Landlord delivers written notice to Tenant that such
amount is delinquent, in addition to such late charge, Tenant shall pay to
Landlord interest on any rent that is not paid when due at the Agreed Interest
Rate following the date such amount became due until paid.
ARTICLE 4
Use Of Premises
4.1 Limitation on Type. Tenant shall use the Premises solely for the
Permitted Use (as described in paragraph 1.6). Tenant shall not do or permit
anything to be done in or about the Premises or Common Area which will (i)
interfere with the rights of other occupants of the Property, (ii) cause
structural damage to the Premises and Tenant fails to promptly commence and
diligently pursue to completion the repair of such damage, or (iii) cause damage
to any part of the Premises or Property except to the extent reasonably
necessary for the installation of Tenant's equipment and trade fixtures and
Tenant fails to promptly commence and diligently pursue to completion the repair
of such damage. Tenant shall not operate any equipment within the Premises which
will (i) injure, vibrate or shake the Premises, (ii) overload existing
electrical system or other mechanical equipment servicing the Premises, or (iii)
impair the efficient operation of the sprinkler system or the heating,
ventilating or air conditioning ("HVAC") equipment servicing the Premises, or
(iv) damage, overload or corrode the sanitary sewer system. Tenant shall not
attach, hang or suspend anything from the ceiling, roof, walls or columns of the
Premises or set any load on the floor in excess of approved structural limits as
defined by Landlord's architect. Any dust, fumes, or waste products generated by
Tenant's use of the Premises shall be contained and disposed so that they do not
(i) create a fire or health hazard, (ii) damage the Premises, or (iii) interfere
with the businesses of other tenants of the Property. All noise or odors
generated by Tenant's use of the Premises shall be contained or muffled so that
they do not interfere with the businesses of other tenants of the Property.
Tenant shall not (i) change the exterior of the Premises (subject to Tenant's
right to install signs pursuant to paragraph 4.5), or (ii) install any equipment
or antennas on or make any penetrations of the exterior or roof of the Premises
without the prior written consent of Landlord. Tenant shall not commit nor
permit to be committed any waste in or about the Premises, and Tenant shall keep
the Premises in a neat, clean, attractive and orderly condition, free of any
objectionable noises, odors, dust or nuisances which may disturb the quiet
enjoyment of other tenants or occupants of the Property. Notwithstanding the
foregoing restrictions, the parties agree as follows:
A. Tenant may bring military fighting vehicles onto the first floor
of the Premises so long an (i) Tenant puts into place such reinforcing as is
reasonably necessary to upgrade the floor load capacity so that it will
6.
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accept such fighting vehicles; and (ii) Tenant repairs any damage to the
Premises caused by the entry of such vehicles.
B. Tenant may install antennas, radio "dishes" or other electronic
equipment reasonably necessary for the conduct of Tenant's business upon the
roof of the Premises so long as (i) such installations are done in compliance
with all Laws and Private Restrictions; (ii) such installations are accomplished
in a manner which does not compromise the watertight integrity of the roof;
(iii) all damage to the Premises caused by such installation is repaired by
Tenant; and (iv) any such equipment is properly and effectively screened from
view in a manner reasonably acceptable to Landlord.
C. In the event Tenant desires to operate equipment within the
Premises that will or may overload existing mechanical, electrical, or other
systems, Tenant may do so only if it first installs, at its sole cost, all
necessary modifications, repairs or upgrades of existing systems so that such
equipment may be operated without overloading such systems as so modified by
Tenant.
4.2 Compliance with Laws and Private Restrictions. Tenant shall not use or
permit any person to use the Premises in any manner which violates any Laws or
Private Restrictions. Tenant shall abide by and promptly observe and comply with
all Laws and Private Restrictions and shall indemnify and hold Landlord harmless
from any liability resulting from Tenant's failure to do so.
4.3 Insurance Requirements. Tenant shall not use or permit any person to
use the Premises or Common Area in any manner which will cause a cancellation of
any Insurance policy covering the Premises. Tenant shall not sell, or permit to
be kept, used, or sold in or about the Premises any article which may be
prohibited by the standard form of fire insurance policy; provided, however,
that Tenant may bring military fighting vehicles onto the first floor of the
Premises as permitted pursuant to subparagraph 4.1A. Tenant shall comply with
all reasonable requirements of any insurance company, insurance underwriter, or
Board of Fire Underwriters which are necessary to maintain, at reasonable rates,
the insurance coverage carried by Landlord pursuant to this Lease.
4.4 Outside Areas. No materials, supplies, storage tanks or containers,
equipment, finished products or semi-finished products, raw materials,
inoperable vehicles or articles of any nature shall be stored upon or permitted
to remain outside of the Premises except in fully fenced and screened areas
outside the Premises which have been designed for such purpose and have been
approved in writing by Landlord for such use by Tenant; provided, however, that
Tenant may bring military fighting vehicles onto the first floor of the Premises
as permitted pursuant to subparagraph 4.1A.
4.5 Signs. Tenant shall not place on any portion of the Premises or the
Property any sign, placard, lettering in or on windows, banner, displays or
other advertising or communicative material which is visible from the exterior
of the Premises without the prior written approval of Landlord. All such
approved signs shall strictly conform to all Laws and Private Restrictions and
shall be installed at the expense of Tenant. If Landlord so elects, Tenant
shall, at the expiration or sooner termination of this Lease, remove all signs
installed by it and repair any damage caused by such removal. Tenant shall at
all times maintain such signs in good condition and repair. Upon Tenant's
written request and at Tenant's cost and expense, Landlord shall remove both of
the Airport Technology Park monument signs located on De La Cruz Boulevard.
Subject to Landlord's prior written approval of Tenant's specific design plan,
(i) Tenant shall have the right to install a monument sign at the entrance to
the Premises, and at the two entrances to Airport Technology Park, and (ii)
Tenant shall have the right to install signs on the exterior of the Premises.
Approved signs installed by Tenant may be illuminated in compliance with the
provisions of applicable Laws and Private Restriction.
4.6 Rules and Regulations. Landlord may from time to time promulgate
reasonable and nondiscriminatory rules and regulations applicable to all
occupants of the Property for the care and orderly management of the Property
and the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there in a conflict between the rules
and regulations and any of the provisions of this Lease, the provisions of this
7.
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Lease shall prevail. Landlord shall not be responsible for the violation by any
other tenant of the Property of any such rules and regulations.
4.7 Parking. Tenant is allocated and shall have the non-exclusive right to
use (without charge in addition to the Base Monthly Rent) no more than the
number of parking spaces contained within the Property described in paragraph
2.1 for its use and the use of its employees and invitees, the location of which
may be designated from time to time by Landlord but shall be on the Property and
within reasonable proximity to the Premises. Tenant shall not at any time use or
permit its employees or invitees to use more parking spaces than the number so
allocated to Tenant or to park or permit the parking of its vehicles or the
vehicles of others in any portion of the Property not designated by Landlord as
a non-exclusive parking area. Landlord shall not oversubscribe the parking
within the Property, and shall assure that the total number of spaces committed
to the non-exclusive use of all tenants of the Property shall not exceed the
total number of spaces within the Common Area. Of the parking spaces allotted to
Tenant pursuant to paragraph 2.1, Tenant shall have the right to designate a
reasonable number of such spaces as reserved spaces for its executives, which
shall not exceed ten percent (10%) of the total of spaces and which shall be in
immediate proximity to the Premises. If Landlord grants to any other tenant the
exclusive right to use any particular parking space(s), neither Tenant nor its
employees or invitees shall use such spaces. Within ten (10) business days after
written request therefor from Landlord, Tenant shall furnish Landlord with a
list of its and its employees vehicle license numbers and Tenant shall
thereafter notify Landlord of any change in such list within five (5) days after
each such change occurs. Tenant shall have the right, at Tenant's option, to
provide its employees with stickers or other identification markers or tags to
be affixed to or on the employees' automobiles or other vehicles, evidencing the
right of such employees to use the parking areas. Such stickers shall be subject
to prior review and approval by Landlord, which shall not be unreasonably
withheld or delayed. Tenant shall furnish to Landlord a list of identifying
numbers for the stickers distributed from time to time by Tenant to its
employees. If Tenant elects to use such stickers as provided herein, Tenant
shall not be obligated to furnish Landlord with a list of vehicle license
numbers for its employees, for as long as Tenant maintains such sticker system
of identification. Landlord reserves the right, after having given Tenant
reasonable notice, to have any vehicles owned by Tenant or its employees or
invitees utilizing parking spaces in excess of the parking spaces allowed for
Tenant's use to be towed away at Tenant's cost. All trucks and delivery vehicles
shall be (i) parked at the rear of the Premises, (ii) loaded and unloaded in a
manner which does not interfere with the businesses of other occupants of the
Property, and (iii) permitted to remain on the Property only so long as is
reasonably necessary to complete loading and unloading. In the event Landlord
elects or is required by any Law to limit or control parking in the Property,
whether by validation of parking tickets or any other method of assessment,
Tenant agrees to participate in such validation or assessment program under such
reasonable rules and regulations as are from time to time established by
Landlord, so long as such participation does not result in any increase in costs
to Tenant.
4.8 Window Coverings. To the extent Tenant elects to use window coverings
visible from the exterior of the Premises, Tenant shall use the same window
covering to cover all windows Tenant so elects to cover in the Premises to
maintain a consistent and uniform exterior appearance.
4.9 Outside Sales. Tenant shall not conduct or permit to be conducted on
any portion of the Common Area any sale of any kind, including (i) any public or
private auction, fire sale, going-out-of-business sale, distress sale or other
liquidation sale, or (ii) any so-called "flea market", open-air market or any
other similar activity. Notwithstanding the foregoing, Tenant shall be allowed
to conduct occasional sales outside of the Premises on that part of the Common
Area that is in close proximity to the Premises so long as each of the following
conditions is satisfied with respect to each such sale: (i) Landlord is given at
least two (2) business days prior written notice of the date of any such sale;
(ii) such sale does not violate any Laws; (iii) such sale is conducted in a
manner that does not interfere with the rights of other occupants of the
Property; (iv) Tenant provides all necessary security, cleans up all debris, and
repairs any damage caused by such sale; and (v) the purpose of such sale is to
permit employees of Tenant to purchase or to receive free of charge property of
Tenant.
8.
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ARTICLE 5
Trade Fixtures And Leasehold Improvements.
5.1 Trade Fixtures. Throughout the Lease Term, Tenant shall provide,
install, and maintain in good condition all Trade Fixtures required in the
conduct of its business in the Premises. All Trade Fixtures shall remain
Tenant's property.
5.2 Leasehold Improvements. The following provisions govern Leasehold
Improvements constructed by Tenant:
A. Tenant shall not construct any Leasehold Improvements or otherwise
alter the Premises without Landlord's prior approval if such action results in
the demolition, removal, or material alteration of existing Improvements
(including partitions, wall and floor coverings, ceilings, lighting fixtures or
other utility installations) and if the cost of such construction or alteration
exceeds Fifteen Thousand Dollars ($15,000) per work of improvement or if the
cost of Leasehold Improvements done, under construction, or for which approval
is sought during any calendar quarter exceeds Twenty-Five Thousand Dollars
($25,000). With respect to any Leasehold Improvements which must be approved by
Landlord pursuant to the immediately preceding sentence, Tenant shall not
commence construction of such Leasehold Improvements until Landlord shall have
first approved the plans and specifications therefor, which approval shall be
deemed given if not denied in writing within ten (10) working days after
Landlord shall have received Tenant's request for such approval. In no event
shall Tenant make any alterations to the Premises which could significantly
affect the structural integrity or the exterior design of the Premises without
Landlord's prior approval.
B. All Leasehold Improvements requiring Landlord's approval shall be
installed by Tenant in substantial compliance with the approved plans and
specifications therefor. All construction undertaken by Tenant shall be done in
accordance with all Laws and in a good and workmanlike manner using materials of
good quality. Tenant shall not commence construction of any Leasehold
Improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, and (iii) if reasonably requested by Landlord, Tenant
shall have obtained contingent liability and broad form builders risk insurance
in an amount reasonably satisfactory to Landlord if there are any perils
relating to the proposed construction not covered by insurance carried pursuant
to Article 9. If Landlord so requests in writing with respect to Leasehold
Improvements requiring Landlord's prior approval, Tenant shall inform Landlord
of Tenant's scheduled date for commencement of construction at least five (5)
days prior to such date of commencement.
C. At all times during the Lease Term, (i) Tenant shall maintain all
plans and change orders prepared in connection with the construction of any
Leasehold Improvements which required a building permit or other governmental
approval, and (ii) Tenant shall provide to Landlord copies of such plans and
change orders (and, to the extent Tenant causes such to be prepared for its own
use, "As-Built" plans) at any time that Landlord requests copies thereof.
D. All Leasehold Improvements shall remain the property of Tenant
during the Lease Term. Tenant shall have the right to remove only the following
kinds of Leasehold Improvements so long as it repairs all damage caused by the
installation thereof and returns the Premises to the condition existing prior to
the installation of such Leasehold Improvements: (i) built-in cabinets, file
drawers and bookcases; (ii) computer room air conditioning; (iii) canteen
equipment; (iv) office cubicle systems; and (v) ornamental statues. At the
expiration or sooner termination of the Lease Term, all Leasehold Improvements
that Tenant does not remove shall be surrendered to Landlord as a part of the
realty and shall then become Landlord's property, and Landlord shall have no
obligation to reimburse Tenant for all or any portion of the value or cost
thereof. However, if Landlord so requires, at the expiration or earlier
termination of the Lease Term, Tenant shall remove any Leasehold Improvements
designated for removal by Landlord and shall restore the Premises to the
condition existing prior to the installation of such Leasehold Improvements to
the extent necessary to return the Premises to substantially the
9.
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same condition that existed on the completion of the Interior Improvements
constructed pursuant to Exhibit "C", ordinary wear and tear excepted.
Notwithstanding the foregoing:
(1) Tenant shall only be required to remove Leasehold Improvements
for which either of the following is true: (i) such Leasehold Improvements were
not approved in writing by Landlord; or (ii) at the time approval was given by
Landlord, Landlord informed Tenant in writing that Landlord would require that
such Leasehold Improvements be removed at the termination of the Lease Term.
(2) Tenant my cause interior partitions to be moved, reconfigured,
or removed altogether, or cause interior offices to be deleted or added, all
without the obligation to restore such partitions or interior offices to any
prior condition upon expiration or termination of the Lease.
5.3 Alterations Required by Law. Tenant shall make any alteration,
addition or change of any sort, whether structural or otherwise, to the Premises
that is required by any Law because of (i) a specific use or change of use made
of the Premises by Tenant (which alteration, addition or change is not generally
required to be made by owners or tenants of other properties similar to the
Premises), (ii) Tenant's application for any permit or governmental approval, or
(iii) Tenant's construction or installation of any Leasehold Improvements or
Trade Fixtures.
5.4 Landlord's Improvements. All fixtures, improvements or equipment which
are installed, constructed on or attached to the Property by Landlord at its
expense shall become a part of the realty and belong to Landlord. Tenant shall
pay additional rent in the event Landlord, in its sole discretion, elects to
make any of the following kinds of capital improvements to the Property: (i)
capital improvements required to be constructed in order to comply with any Law
not in affect or applicable to the Property as of the Commencement Date; (ii)
modification of existing or construction of additional capital improvements or
building service equipment for the purpose of reducing the consumption of
utility services or Common Operating Expenses of the Property; (iii) replacement
of capital improvements or building service equipment existing as of the
Commencement Date when required because of normal wear and tear; and (iv) the
amount of "deductibles" paid by Landlord for the restoration of any part of the
Property that has been damaged to the extent such "deductible" is not included
within Common Operating Expenses. With respect to any expenditure in excess of
Fifty Thousand Dollars ($50,000) for which Landlord seeks contribution pursuant
to this paragraph 5.4 from Tenant, prior to incurring such expense, Landlord
shall notify Tenant of the nature and estimated amount of such expenditure and,
if Tenant so requests, shall provide Tenant with such information upon which
such cost estimate is based for Tenant's approval. The amount of additional rent
Tenant is to pay with respect to each such capital improvement shall be
determined as follows:
A. Tenant shall have the option to pay in cash an amount equal to
Tenant's Allocated Share of all costs paid by Landlord to construct the
improvements in question fairly allocable to the Premises (including financing
costs) in cash within thirty (30) days after the improvement has been
substantially completed and Landlord has notified Tenant of the cost of such
improvement and the amount of Tenant's required contribution. If Tenant does not
exercise such option to pay such amount in cash, then the provisions of
subparagraph 5.4B shall apply.
B. All costs paid by Landlord to construct such improvement
(including financing costs) shall be amortized on a straight line basis over the
useful life of such improvement (determined in accordance with generally
accepted accounting principles) with interest on the unamortized balance at the
then prevailing market rate Landlord would pay if it borrowed funds to construct
such improvement from an institutional lender, and Landlord shall inform Tenant
of the monthly amortization payment required to so amortize such costs, and
shall also provide Tenant with the information upon which such determination is
made. As additional rent, Tenant shall pay an amount equal to Tenant's Allocated
Share of that portion of such monthly amortization payment fairly allocable to
the Promises (as reasonably determined by Landlord) for each month after such
improvement is completed until the first to occur of (i) the expiration of the
Lease Term (as the same may be extended), or (ii) the end of the term over which
such costs were amortized, which amount shall be due at the same time the Base
Monthly Rent is due.
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C. Notwithstanding anything contained in this paragraph 5.4, the
additional rent Tenant is to pay with respect to any modification of existing or
construction of additional capital improvements or building service equipment
for the purpose of reducing the consumption of utility expenses or Common
Operating Expenses of the Property shall not for any period exceed the actual
amount of savings in Additional Rent realized by Tenant as a result of such
modification or construction.
5.5 Liens. Tenant shall keep the Premises and the Property free from any
liens and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees or
contractors relating to the Premises. If any claim of lien is recorded, Tenant
shall bond against or discharge the same within thirty (30) days after the same
has been recorded against the Premises and/or the Property. Should any lien be
filed against the Premises or any action commenced affecting title to the
Premises, the party receiving notice of such lien or action shall immediately
give the other party written notice thereof.
ARTICLE 6
Repair And Maintenance
6.1 Tenant's Obligation to Maintain. Except as otherwise provided in
paragraph 6.2 and in Article 11 regarding the restoration of damage caused by
fire and other perils, Tenant shall, at all times during the Lease Term, clean,
keep, and maintain in good order, condition, and repair the Premises and every
part thereof, through regular inspections and servicing, including, but not
limited to, (i) all plumbing and sewage facilities (including all sinks,
toilets, faucets and drains), and all ducts, pipes, vents or other parts of the
HVAC or plumbing system, (ii) all fixtures, interior walls, floors, carpets and
ceilings, (iii) all windows, doors, entrances, plate glass, showcases and
skylights (including cleaning both interior and exterior surfaces), (iv) all
electrical facilities and all HVAC equipment and other mechanical systems
(including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust
equipment and systems), (v) any automatic fire extinguisher equipment in the
Premises, and (vi) the roof membrane (including any necessary resurfacing or
patching to preserve the membrane or to repair leaks except that Tenant shall
not be required to make any repair to the extent such repair is required because
of Landlord's repair or maintenance of the structural roof system). Tenant shall
replace any damaged or broken glass in the Premises (including all interior and
exterior doors and windows) with glass of the same kind, size and quality.
Tenant shall repair any damage to the Premises (including exterior doors and
windows) caused by vandalism or any unauthorized entry. Tenant shall maintain
continuously throughout the Lease Term a service contract for the maintenance of
all HVAC equipment serving the Premises with a licensed HVAC repair and
maintenance contractor, which contract provides for the periodic inspection and
servicing of the HVAC equipment at least once every sixty (60) days during the
Lease Term. Tenant shall also maintain continuously throughout the Lease Term a
service contract for the washing of all windows (both interior and exterior
surfaces) in the Premises with a contractor, which contract provides for the
periodic washing of all such windows on such basis as shall keep the exterior
appearance of the Premises in first class condition, but no less frequently than
once, every calendar year. If and when Landlord so requests in writing, Tenant
shall furnish Landlord with copies of all such service contracts. All repairs
and replacements required of Tenant shall be promptly made with materials of
good quality. If the work affects the structural parts of the Premises or if the
estimated cost of any item of repair or replacement is in excess of Fifteen
Thousand Dollars ($15,000), then Tenant shall first obtain Landlord's written
approval of the scope of work, plans therefor, and materials to be used, except
in the case of emergency in which event Tenant shall within a reasonable period
of time after performing the work, notify Landlord of the scope of the work
performed and the materials used, and shall furnish Landlord with the plans
therefor.
6.2 Landlord's Obligation to Maintain. Landlord, at its cost without right
of reimbursement from Tenant, shall be responsible for the maintenance, repair,
and replacement of the structural parts of the Premises (i.e., foundation, first
and second story floor slab and second story floor deck, load-bearing walls, and
structural roof system, but excluding roof membrane) except to the extent that
(i) the same is necessitated by the wrongful or negligent act or omission of
Tenant, its subtenants, or their respective agents, employees, contractors, or
invitees, or (ii) reimbursement is permitted pursuant to paragraph 5.4 hereof.
Landlord at its cost without right of reimbursement from Tenant, shall repair
damage to interior improvements and Leasehold Improvements that have been
approved by Landlord pursuant to the terms hereof, or damage to the roof
membrane of the Premises if caused by the maintenance work required to be
performed by Landlord pursuant to the provisions of this paragraph.
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Landlord shall repair, maintain, operate and replace when necessary the Common
Area, with such right of reimbursement from Tenant as is specified in paragraphs
5.4 and 6.3. The parties acknowledge that the air-conditioning units located on
the roof of the Premises were installed when the Building was constructed and
subsequently have not operated. Landlord agrees to make any repairs necessary to
put such units in good operating condition, if within the six month period
following the Commencement Date, Tenant notifies Landlord in writing of the need
for such repairs. Landlord shall not be responsible for repairs required by an
accident, fire or other peril except as otherwise required by Article 11, or for
damage caused to any part of the Property by any act, negligence or omission of
Tenant or its agents, contractors, employees or invitees. Landlord may engage
contractors of its choice to perform the obligations required of it by this
Article, and the necessity of any expenditure to perform such obligations shall
be at the sole discretion of Landlord.
6.3 Tenant's Obligation to Reimburse. As additional rent, commencing on
the Rent Start Date and continuing throughout the remainder of the Lease Term,
Tenant shall pay Tenant's Allocated Share of all Common Operating Expenses
fairly allocable to the Premises including (i) all Common Operating Expenses
paid with respect to the maintenance, repair, replacement and use of the
Premises and (ii) a proportionate share (based on the Premises Gross Leaseable
Area as a percentage of the Property Gross Leaseable Area) of all Common Area
Expenses which relate to Property in general and are not fairly allocable to any
one building on the Property. Landlord agrees that it shall not recover from all
tenants of the Property more than one hundred percent (100%) of the actual
Common Operating Expenses incurred by Landlord for the period in question. As
provided in paragraph 3.3, Tenant's obligation to pay Tenant's Allocated Share
of Common Operating Expenses fairly allocable to the Premises shall be prorated
as of the Rent Start Date and at the expiration or earlier termination of the
Lease Term, and if Tenant has paid any amount on account of Common Operating
Expenses relating to a period that is not within the Lease Term (e.g.,
prepayment of insurance premiums for one year), such amount shall be reimbursed
to Tenant in connection with such proration. Payment shall be made by whichever
of the following methods is from time to time designated by Landlord, and
Landlord may change the method of payment at any time so long as (i) Landlord
gives Tenant at least sixty (60) days prior written notice, and (ii) the method
is not changed more than once in any calendar year. Tenant shall pay such share
of the actual Common Operating Expenses incurred or paid by Landlord but not
theretofore billed to Tenant within thirty (30) days after receipt of a written
bill therefor from Landlord, on such periodic basis as Landlord shall designate,
but in no event more frequently than once a month. Alternatively, (i) Landlord
shall deliver to Tenant Landlord's reasonable estimate of the Common Operating
Expenses it anticipates will be paid or incurred for the calendar year in
question, (ii) during such calendar year, Tenant shall pay such share of the
estimated Common Operating Expenses in advance in monthly installments as
required by Landlord due with the installments of Base Monthly Rent, and (iii)
within ninety (90) days after the end of each calendar year, Landlord shall
furnish to Tenant a statement in reasonable detail of the actual Common
Operating Expenses paid or incurred by Landlord during the just ending calendar
year and thereupon there shall be an adjustment between Landlord and Tenant,
with payment to Landlord or credit by Landlord against the next installment of
Base Monthly Rent, as the case may require, within thirty (30) days after
delivery by Landlord to Tenant of said statement, so that Landlord shall receive
the entire amount of Tenant's share of all Common Operating Expenses for such
calendar year and no more. Tenant and its agents (including accountants) shall
have the right at its expense, exercisable upon reasonable prior written notice
to Landlord, to inspect at Landlord's office during normal business hours
Landlord's books and records as they relate to Common Operating Expenses. Such
inspection must be made within one hundred eighty (180) days of Tenant's receipt
of Landlord's annual statement for the same, and shall be limited to
verification of the charges contained in such statement. Tenant may not withhold
payment of such bill pending completion of such inspection.
6.4 Common Operating Expenses Defined. The term "Common Operating
Expenses" shall mean the sum of the following:
A. All costs and expenses paid or incurred by Landlord in doing the
following (including payments to independent contractors providing services
related to the performance of the following): (i) maintaining, cleaning, and
repairing the exterior surfaces (including painting of exterior surfaces of
buildings not more than once every 5 years) of all buildings located on the
Property; (ii) maintenance of the liability, fire and property damage insurance
covering the Property carried by Landlord pursuant to paragraph 9.2 (including
the payment of commercially reasonable "deductibles" and the prepayment of
premiums for coverage of up to one year); (iii) maintaining, repairing,
operating and replacing when necessary HVAC equipment, utility facilities and
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other building service equipment; (iv) providing utilities to the Common Area
(including lighting, trash removal and water for landscaping irrigation); (v)
complying with all applicable Laws and Private Restrictions; (vi) operating,
maintaining, repairing, cleaning, painting, restriping and resurfacing the
Common Area; (vii) replacement or installation of lighting fixtures, directional
or other signs and signals, irrigation systems, tress, shrubs, ground cover and
other plant materials, and all landscaping in the Common Area; and (viii)
depreciation and financing costs on maintenance and operating machinery and
equipment (if owned) and rental paid for such machinery and equipment (if
rented);
B. All additional costs and expenses incurred by Landlord with
respect to the operation, protection, maintenance, repair and replacement of the
Property which pursuant to generally accepted accounting principles would be
considered a current expense and not a capital expenditure;
C. That portion of all compensation (including benefits and premium
for workers' compensation and other insurance) paid to or on behalf of employees
of Landlord but only to the extent they are involved in the performance of the
work described by subparagraphs A and B above and that is fairly allocable to
the Property;
D. An additional amount equal to a commercially reasonable and
competitive management fee that would be charged by an independent third party
property manager for the management of the Property (except that Tenant's
Allocated Share of such management fee for any period shall not exceed two
percent (2%)of the Base Monthly Rent and Additional Rent payable by Tenant for
the same period); and
E. Notwithstanding anything contained herein, the term "Common
Operating Expenses" shall not include any of the following: (i) mortgage
principle payments; (ii) ground rent and other payments made pursuant to any
ground lease affecting the Property; (iii) the cost of refinancing any loan
Secured by the Property; (iv) interest and penalties imposed against Landlord
for late payments by Landlord; (v) legal fees incurred by Landlord in connection
with the negotiation or enforcement of, or litigation in connection with, any
lease affecting the Property; (vi) the cost of any paintings, sculptures, or
other art objects installed on the Property; (vii) any costs reimbursed to
Landlord by insurance or other third party payments that are not reimbursements
by tenants for their share of Common Operating Expenses; (viii) brokerage
commissions or other costs related to the leasing of space within the Property;
(ix) the cost of any tenant improvements installed for the exclusive use of any
other tenant of the Property.
6.5 Control of Common Area. Landlord shall at all times have exclusive
control of the Common Area. Landlord shall have the right, without the same
constituting an actual or constructive eviction and without entitling Tenant to
any abatement of rent, to: (i) close any part of the Common Area to the minimum
extent reasonably necessary in the reasonable opinion of Landlord's counsel to
prevent a dedication thereof or the accrual of any prescriptive rights therein;
(ii) temporarily close the Common Area to perform maintenance or for any other
reason deemed sufficient by Landlord; (iii) designate other property outside the
boundaries of the Property to become part of the Property; (iv) construct multi-
deck parking structures in any part of the Common Area; (v) change the shape,
size, location, number and extent of improvements on the Common Area; (vi)
select a third party to maintain and operate any of the Common Area at any time
Landlord determines that the best interests of the Property will be served by
having the Common Area maintained and operated by that third party so long as
the fees and charges of such third party are reasonable and competitive with the
fees of others in the marketplace providing the same services; (vii) make
changes to the Common Area including, without limitation, changes in the
location of driveways, parking spaces, parking areas, sidewalks or the direction
of the flow of traffic and the site of the Common Area; and/or (viii)
voluntarily change the address of the Property. Landlord agrees not to change
the name of Airport Technology Park without the prior consent of Tenant. The use
of the Common Area shall be subject to such reasonable regulation and changes
therein as Landlord shall make from time to time. Landlord shall not exercise
its rights to control the Common Area in a manner that would materially
interfere with Tenant's use of the Premises without first obtaining Tenant's
approval. Tenant shall keep the Common Area free and clear of all obstructions
created or permitted by Tenant. If in the opinion of Landlord unauthorized
persons are using any of the Common Area by reason of the presence of Tenant in
the Premises, Tenant, upon demand of Landlord, shall restrain such unauthorized
use by appropriate proceedings. Nothing herein shall affect the right of
Landlord at any time to remove such unauthorized person from the Common Area nor
to prohibit the use of the Common Area by
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unauthorized persons. In exercising any such rights described in this paragraph
6.5 regarding the Common Area, Landlord shall make a reasonable effort to
minimize any disruption to Tenant's business.
6.6 Tenant's Negligence. Anything in this Lease to the contrary
notwithstanding, Tenant shall pay for all damage to the Premises or the Property
caused by the negligent act or omission of Tenant, its employees, contractors,
or invitees, or by the failure of Tenant to discharge promptly its obligations
under this Lease, or to comply with the terms of this Lease, but only to the
extent such damage is not covered by insurance proceeds actually recovered by
Landlord. Tenant shall make payment within thirty (30) days after demand
therefor by Landlord.
ARTICLE 7
Waste Disposal And Utilities
7.1 Waste Disposal. Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are (i) fully fenced and
screened in compliance with all Private Restrictions, (ii) designed for such
purpose to be used either exclusively by Tenant or in common with other
occupants of the Property, as designated by Landlord, and (iii) first approved
by Landlord. All entrances to such outside trash enclosures shall be kept
closed, and waste shall be stored in such manner as not to be visible from the
exterior of such outside enclosures. Tenant shall cause all of its waste to be
regularly removed from the Property at Tenant's sole cost. Tenant shall keep all
fire corridors and mechanical equipment rooms in the Premises free and clear of
all obstructions at all times.
7.2 Hazardous Materials. Landlord and Tenant agree as follows with respect
to the existence or use of Hazardous Materials on the Property:
A. Landlord hereby makes the following representations to Tenant,
each of which is made to the best of Landlord's knowledge as of the Commencement
Date:
(1) The soil and ground water on or under the Property does not
contain Hazardous Materials in amounts which violate any Hazardous Materials
Laws to the extent that any governmental entity could require either Landlord or
Tenant to take any remedial action or impose any penalties with respect to such
Hazardous Materials.
(2) During Landlord's period of ownership, no litigation or any
administrative proceeding has been brought or threatened, nor any settlements
reached with any governmental or private party, concerning the actual or alleged
presence of Hazardous Materials on or about the Property or any disposal,
release or threatened release of Hazardous Materials in or about the Property.
(3) During the time that Landlord has owned the Property, Landlord
has received no notice of (i) any violation, or alleged violation, of any
Hazardous Material Law that has not been corrected to the satisfaction of the
appropriate authority, (ii) any pending claims relating to the presence of
Hazardous Material on the Property, or (iii) any pending investigation by any
governmental agency concerning the Property relating to Hazardous Materials.
(4) The Property does not contain any (i) equipment containing
PCBs, or (ii) underground storage tanks.
B. Any handling, transportation, storage, treatment, disposal or use
of Hazardous Materials by Tenant and Tenant's agents, employees, contractors,
invitees or subtenants after the Commencement Date in or about the Property
shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall
indemnify, defend upon demand with counsel reasonably acceptable to Landlord,
and hold harmless Landlord from and against any and all liabilities, losses,
claims, damages, interest, penalties, fines, monetary sanctions, attorneys'
fees, experts' fees, court costs, remediation costs, investigation costs, and
other expenses which result from or arise in any manner whatsoever out of the
use, storage, treatment, transportation, release, or disposal of Hazardous
Materials on or about
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the Property by Tenant or Tenant's agents, employees, contractors, invitees or
subtenants after the Commencement Date.
C. If the presence of Hazardous Materials on the Property caused or
permitted by Tenant or Tenant's agents, employees, contractors, invitees or
subtenants after the Commencement Date results in contamination or deterioration
of water or soil resulting in a level of contamination greater than the levels
established, is acceptable by any governmental agency having Jurisdiction over
such contamination, then Tenant shall promptly take any and all action necessary
to clean up such contamination if required by Law or as a condition to the
issuance or continuing effectiveness of any governmental approval which relates
to the use of the Property or any part thereof. Tenant shall further be solely
responsible for, and shall defend, indemnify and hold Landlord and its agents
harmless from and against, all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with any removal,
clean-up and restoration work and materials required hereunder to return the
Property to its condition existing prior to the appearance of such Hazardous
Materials.
D. Landlord and Tenant shall each give written notice to the other as
soon as reasonably practicable of (i) any communication received from any
governmental authority concerning Hazardous Materials which relates to the
Property, and (ii) any contamination of the Property by Hazardous Materials
which constitutes a violation of any Hazardous Materials Law. Landlord and
Tenant each agree to keep such information confidential, except for (i)
disclosures that are approved by the other party, (ii) disclosures required by
Law or court order, (iii) disclosures to any environmental consultant, lender,
purchaser, prospective purchaser, attorneys for either Landlord or Tenant, or
brokers for either Landlord or Tenant, so long as an agreement of
confidentiality is obtained from a party to whom the disclosure is to be made,
and (iv) disclosures in connection with any litigation or administrative
proceeding in which either Landlord or Tenant is involved. Tenant and Tenant's
agents, employees, contractors, invitees or subtenants shall not bring Hazardous
Materials onto the Property without first obtaining the written consent of
Landlord; provided, however, Tenant may, without being required to obtain the
prior written consent of Landlord, use at the Premises in small quantities
office supplies, cleaning materials and other maintenance materials that are
customarily used in business offices, even though such supplies and materials
may fall within the definition of Hazardous Materials. At any time during the
Lease Term, Tenant shall, within five days after written request therefor
received from Landlord, disclose in writing all Hazardous Materials that are
being used by Tenant on the Property, the nature of such use, and the manner of
storage and disposal.
E. Landlord may cause testing wells to be installed on the Property,
and may cause the ground water to be tested to detect the presence of Hazardous
Material by the use of such tests as are then customarily used for such
purposes. Any such installation of wells or tests shall be done in a manner
which minimizes the interference with Tenant's use of the Premises. If Tenant so
requests, Landlord shall supply Tenant with copies of such test results. The
cost of such tests and of the installation, maintenance, repair and replacement
of such wells shall be paid by Tenant if such tests disclose the existence of
facts which give rise to liability of Tenant pursuant to its indemnity given in
subparagraph 7.2B or 7.2C, and Tenant's liability is established in a judicial
or administrative proceeding, or in an action for declaratory relief brought by
Landlord.
F. Landlord, at its sole cost, shall comply with all Hazardous
Materials Laws affecting the Property (without right of reimbursement from
Tenant) to the extent that (i) Landlord is legally obligated to do so by such
Laws, and (ii) such compliance (or the cost of such compliance) is not made the
responsibility of Tenant pursuant to subparagraph 7.2B or subparagraph 7.2C.
Landlord shall indemnify, defend upon demand with competent counsel, and hold
harmless Tenant from and against any and all liability for response costs
imposed upon Tenant by any governmental agency pursuant to the federal Law known
as "CERCLA" (more particularly identified in subparagraph 7.2G) and the
comparable California statute (commonly known as the Carpenter-Presley-Tanner
Hazardous Substances Account Act, California Health and Safety Code Section
25300 et seq.) that results from the presence of Hazardous Materials on the
Property not caused or contributed to by the use, storage, treatment, release or
disposal of Hazardous Materials on or about the Property by Tenant, its
subtenants, or their respective agents, employees, contractors, or invitees.
Notwithstanding the foregoing, the indemnity given by Landlord in the
immediately preceding sentence shall not apply with respect to liability caused
by any contamination of the Property by a Hazardous Material that is or has been
used, stored, treated, released or disposed of on the Property by Tenant, its
subtenants, or their respective agents, employees, contractors, or invitees
unless Tenant can prove such contamination was not caused or contributed to by
any of such parties.
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G. As used herein, the term "Hazardous Material," means any hazardous
or toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or the United States Government.
The term "Hazardous Material," includes, without limitation, asbestos, PCB's,
petroleum and petroleum products, and any material or substance which in (i)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq. (42
U.S.C. (S)6903), or (iii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 U.S.C. (S)9601 et seq. (42 U.S.C. 19601). As used herein, the
term "Hazardous Material Law" shall mean any statute, law, ordinance, or
regulation of any governmental body or agency (including the U.S. Environmental
Protection Agency, the California Regional Water Quality Control Board, and the
California Department of Health Services) which regulates the use, storage,
release or disposal of any Hazardous Material.
H. The obligations of Landlord and Tenant under this paragraph 7.2
shall survive the expiration or earlier termination of the Lease Term. The
rights and obligations of Landlord and Tenant with respect to issues relating to
Hazardous Materials are exclusively established by this paragraph 7.2. In the
event of any inconsistency between any other part of this Lease and this
paragraph 7.2, the terms of this paragraph 7.2 shall control.
7.3 Utilities. Tenant shall promptly pay, as the same become due, all
charges for water, gas, electricity, telephone, sewer service, waste pick-up and
any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, standby fees,
and (ii) penalties for discontinued or interrupted service.
7.4 Compliance with Governmental Regulations. Landlord and Tenant shall
comply with all rules, regulations and requirements promulgated by national,
state or local governmental agencies or utility suppliers concerning the use of
utility services, including any rationing, limitation or other control. Landlord
may voluntarily cooperate in a reasonable manner with the efforts of all
governmental agencies or utility suppliers in reducing energy or other resource
consumption. Tenant shall not be entitled to terminate this Lease nor to any
abatement in rent by reason of such compliance or cooperation. Tenant agrees at
all times to cooperate fully with Landlord and to abide by all rules,
regulations and requirements which Landlord may prescribe in order to maximize
the efficient operation of the HVAC system and all other utility systems.
ARTICLE 8
Real Property Taxes
8.1 Real Property Taxes Defined. The term "Real Property Taxes" as used
herein shall mean (i) all taxes, assessments, levies, and other charges of any
kind or nature whatsoever, general and special, foreseen and unforeseen
(including all installments of principal and interest required to pay any
existing or future general or special assessments for public improvements,
services or benefits, and any increases resulting from reassessments or
resulting from a change in ownership or any other cause), now or hereafter
imposed by any governmental or quasi-governmental authority or special district
having the direct or indirect power to tax or levy assessments, which are levied
or assessed against, or with respect to the value, occupancy or use of, all or
any portion of the Property (as now constructed or as may at any time hereafter
be constructed, altered, or otherwise changed) or Landlord's interest therein,
the fixtures, equipment and other property of Landlord, real or personal, that
are an integral part of and located on the Property, the gross receipts, income,
or rentals from the Property, or the use of parking areas, public utilities, or
energy within the Property, (ii) all charges, levies or fees imposed by reason
of environmental regulation or other governmental control of the Property
(excluding costs and expenses for which Landlord is responsible pursuant to
subparagraph 7.2F), and (iii) all costs and fees (including attorneys' fees)
incurred by Landlord in contesting any Real Property Tax and in negotiating with
public authorities as to any Real Property Tax. If at any time during the Lease
Term the method of taxation or assessment of the Property prevailing as of the
Commencement Date shall be altered so that in lieu of or in addition to any Real
Property Tax described above there shall be levied, assessed or imposed (whether
by reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate or additional tax or charge (i)
on the value, use or
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occupancy of the Property, (ii) on or measured by the gross receipts, income, or
rentals from the Property, (iii) on Landlord's business of leasing the Property,
or (iv) computed in any manner with respect to the operation of the Property,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Property,
then only that part of such Real Property Tax that is fairly allocable to the
Property shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
8.2 Tenant's Obligation to Reimburse. As Additional Rent, Tenant shall pay
to Landlord Tenant's Allocated Share of all Real Property Taxes which become due
after the Rent Start Date and during the Lease Term which are fairly allocable
to the Premises, which include (i) all Real Property Taxes assessed with respect
to the value, use or occupancy of the Premises and the land beneath it, and (ii)
a proportionate share (based on the Premises Gross Leaseable Area as a
percentage of the Property Gross Leaseable Area) of all Real Property Taxes
assessed with respect to the Common Area or with respect to the Property in
general which are not fairly allocable to any one building on the Property.
Tenant shall pay its share of Real Property Taxes (i) within thirty (30) days
after being billed for the same by Landlord, or (ii) no later than ten (10) days
before such Real Property Tax becomes delinquent, whichever last occurs. If
requested by Tenant in writing within one year from receipt of a bill for
Tenant's Allocated Share of Real Property Taxes, Landlord shall furnish Tenant
with such evidence as is reasonably available to Landlord with respect to the
amount of any Real Property Tax which is part of such bill. Tenant may not
withhold payment of such bill pending receipt and/or review of such evidence.
Upon Landlord's election or if any Lender requires Landlord to impound Real
Property Taxes on a periodic basis during the Lease Term, then Tenant, on notice
from Landlord indicating this requirement, shall pay a sum of money toward its
liability under this Article to Landlord on the same periodic basis in
accordance with the Lender's requirements (if any). Landlord shall impound the
Real Property Tax payments received from Tenant in accordance with the
requirements of the Lender (if any). If any assessments are levied against the
Property, Landlord may elect either to pay the amount in full or to allow the
assessment to go to bond. If Landlord pays the assessment in full, Tenant shall
pay to Landlord each time payment of Real Property Taxes is made a sum equal to
that which would have been payable (as both principal and interest) had Landlord
allowed the assessment to go to bond. Notwithstanding anything to the contrary
contained in paragraphs 8.1 and 8.2, if there is an increase in Real Property
Taxes resulting from a "change in ownership" (as that term is defined in
California Revenue and Taxation Code Section 60 et seq.) which occurs prior to
the fourth (4th) anniversary of the Commencement Date, then Tenant shall not be
obligated to pay any such increase that results from such "change of ownership".
8.3 Taxes on Tenant's Property. Tenant shall pay before delinquency any
and all taxes, assessments, license fees and public charges levied, assessed or
imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises which become due during the Lease Term.
Tenant shall furnish Landlord with satisfactory evidence of these payments
within thirty (30) days after receipt of written request therefor from Landlord.
ARTICLE 9
Insurance
9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all
of the following:
A. Tenant shall procure, pay for and keep in full force and affect
the following:
(1) Commercial general liability insurance, including property
damage, against liability for personal injury, bodily injury, death and damage
to property occurring in or about, or resulting from an occurrence in or about,
the Premises with combined single limit coverage of not less than the amount of
Tenant's Minimum Liability Insurance Coverage set forth in paragraph 1.8, which
insurance shall contain a "contractual liability" endorsement insuring Tenant's
performance of Tenant's obligation to indemnify Landlord contained in paragraph
10.3;
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(2) Plate-glass insurance, at actual replacement cost; and
(3) Fire and property damage insurance against loss caused by
fire, extended coverage perils including steam boiler insurance, sprinkler
leakage, if applicable, vandalism, malicious mischief and such other additional
perils as now are or hereafter may be included in a standard extended coverage
endorsement from time to time in general use in the county in which, the
Property is located, insuring Tenant's personal property, inventory, Trade
Fixtures and Leasehold Improvements within the Premises for the full actual
replacement cost thereof.
B. Where applicable and required by Landlord, each policy of
insurance required to be carried by Tenant pursuant to this paragraph (i) shall
name Landlord and such other parties in interest as Landlord designates as
additional insureds; (ii) shall be primary insurance which provides that the
insurer shall be liable for the full amount of the loss up to and including the
total amount of liability set forth in the declarations without the right of
contribution from any other insurance coverage of Landlord; (iii) shall be in a
form satisfactory to Landlord; (iv) shall be carried with companies reasonably
acceptable to Landlord; (v) shall provide that such policy shall not be subject
to cancellation, lapse or change except after at least thirty (30) days prior
written notice to Landlord; (vi) shall not have a "deductible" in excess of
$500,000 or such greater amount as is approved by Landlord; (vii) shall (to the
extent available) contain a waiver by the insurer of any right to subrogation
against Landlord, its agents, employees and contractors which might arise by
reason of any payment under such policy or by reason of any act or omission of
Landlord, its agents, employees or contractors; and (viii) shall contain a
"severability" clause. If Tenant has in force and affect a blanket policy of
liability insurance with the same coverage for the Premises as described above,
as well as other coverage of other premises and properties of Tenant, or in
which Tenant has some interest, such blanket insurance shall satisfy the
requirements hereof.
C. A certificate of each paid-up policy evidencing the insurance
requited to be carried by Tenant pursuant to this paragraph (appropriately
authenticated by the insurer), certifying that such policy has been issued,
providing the coverage required by this paragraph, and containing the provisions
specified herein, shall be delivered to Landlord prior to the time Tenant or any
of its contractors enters the Premises and upon renewal of such policies, but
not less than five (5) days prior to the expiration of the term of such
coverage. If Landlord's insurance advisor reasonably determines at any time that
the amount of coverage required for any policy of insurance Tenant is to obtain
pursuant to this paragraph is not adequate, then Tenant shall increase such
coverage for such insurance to such amount as Landlord's insurance advisor
reasonably deems adequate, not to exceed the level of coverage commonly carried
by comparable businesses similarly situated for such insurance; provided,
however, that Landlord may not require an adjustment pursuant to this sentence
more frequently than once every two (2) years during the Lease Term.
9.2 Landlord's Insurance. Landlord shall have the following obligations
and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and property
damage insurance in so-called "all risk" form insuring Landlord (and such others
as Landlord may designate) against loss of rents for a period of not less than
six, (6) months and from physical damage to the Premises with coverage of not
less than the full replacement cost of (i) the building of which the Premises
are a part, including the structural elements thereof and all electrical,
mechanical, plumbing, and other systems, and (ii) all Interior Improvements
constructed pursuant to the Interior Improvement Agreement attached as Exhibit
"C". Landlord may so insure the Premises separately, or may insure the Premises
with other buildings and improvements within the Property and/or other property
owned by Landlord which Landlord elects to insure together under the same policy
or policies. Such fire and property damage insurance, at Landlord's election,
(i) may be endorsed to cover loss caused by such additional perils against which
Landlord may elect to insure, including earthquake and/or flood, (ii) shall
contain commercially reasonable "deductibles" which, in the case of earthquake
and flood insurance, may be up to ten percent (10%) of the replacement value of
the property insured or such higher amount as is then commercially reasonable,
(iii) may provide coverage for loss of rents for a period of up to twelve (12)
months, and (iv) may contain additional endorsements or coverage reasonably
required by Landlord or any Lender, including an "agreed amount" endorsement,
demolition insurance (covering the cost of demolishing damaged improvements or
improvements required by Law to be demolished), and difference in condition
coverage. Landlord shall not be required to cause
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such insurance to cover any Trade Fixtures, Leasehold Improvements or any
inventory or other personal property of Tenant.
B. Landlord may maintain a policy or policies of commercial general
liability insurance insuring Landlord (and such others as are designated by
Landlord) against liability for personal injury, bodily injury, death and damage
to property occurring or resulting from an occurrence in, on or about the
Property, with combined single limit coverage in such amount as Landlord may
from time to time determine is reasonably necessary for its protection and with
commercially reasonable deductibles.
9.3 Tenant's Obligation to Reimburse. The cost of the insurance carried by
Landlord pursuant to paragraph 9.2 (and any commercially reasonable "deductible"
amount paid by Landlord in connection with the restoration of any lose and
excluded from the coverage of such insurance) shall be a Common Operating
Expense and Tenant shall pay its share thereof as provided in paragraph 6.3.
However, if Landlord's insurance rates for the Premises are increased at any
time during the Lease Term as a result of the nature of Tenant's use of the
Premises, Tenant shall reimburse Landlord for the full amount of such increase
immediately upon receipt of a bill from Landlord therefor.
9.4 Release and Waiver of Subrogation. The parties hereto release each
other, and their respective agents and employees, from any liability for injury
to any person or damage to property that is caused by or results from any risk
insured against under any valid and collectible insurance policy carried by
either of the parties which contains a waiver of subrogation by the insurer and
is in force at the time of such injury or damage, subject to the following
limitations: (i) the foregoing provisions shall not apply to the commercial
general liability insurance described by subparagraph 9.1A and 9.1B; and (ii)
such release shall apply to liability resulting from any risk insured against or
covered by self-insurance maintained or provided by Tenant to satisfy the
requirements of paragraph 9.1. This release shall be in effect only so long as
the applicable insurance policy contains a clause to the effect that this
release shall not affect the right of the insured to recover under such policy.
Each party shall use reasonable efforts to cause each insurance policy obtained
by it to provide that the insurer waives all right of recovery by way of
subrogation against the other party and its agents and employees in connection
with any injury or damage covered by such policy. However, if any insurance
policy cannot be obtained with such a waiver of subrogation, or if such waiver
of subrogation is only available at additional cost and the party for whose
benefit the waiver is to be obtained does not pay such additional cost, then the
party obtaining such insurance shall notify the other party of that fact and
thereupon shall be relieved of the obligation to obtain such waiver of
subrogation rights from the insurer with respect to the particular insurance
involved.
ARTICLE 10
Limitation On Landlord's Liability And Indemnity
10.1 Limitation on Landlord's Liability. Landlord shall not be liable to
Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement
of rent, for any injury to Tenant, its agents, employees, contractors or
invitees, damage to Tenant's property, or loss to Tenant's business resulting
from any cause, including without limitation any (i) failure, interruption or
installation of any HVAC or other utility system or service; (ii) failure to
furnish or delay in furnishing any utilities or services when such failure or
delay is caused by Acts of God or the elements, labor disturbances of any
character, any other accidents or other conditions beyond the reasonable control
of Landlord; (iii) limitation, curtailment, rationing or restriction on the use
of water or electricity, gas or any other form of energy or any services or
utility serving the Premises; (iv) vandalism or forcible entry by unauthorized
persons; or (v) penetration of water into or onto any portion of the Premises or
the Common Area through roof leaks or otherwise. Notwithstanding the foregoing:
A. Subject to paragraph 9.4, Landlord shall be liable for any such
injury, damage or loss which is proximately caused by Landlord's gross
negligence or willful misconduct, of which Landlord has actual notice and a
reasonable opportunity to cure but which it fails to so cure.
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B. Tenant shall have the option to terminate this Lease upon the
occurrence of the following: (i) water, electricity, or other utility service
essential to the conduct of Tenant's business in the Premises is interrupted or
substantially impaired for a period of more than two hundred seventy (270)
consecutive days during which time the Premises are rendered substantially
unusable for the conduct of Tenant's business (a "Material Interruption"); and
(ii) the Material Interruption is not caused by the act or omission of Tenant,
its agents, employees or contractors.
10.2 Limitation on Tenant's Recourse. So long as the Landlord is a
corporation, trust, partnership, joint venture, unincorporated association or
other form of business entity, (i) the obligations of Landlord shall not
constitute personal obligations of the officers, directors, trustees, partners,
joint venturers, members, owners, stockholders, or other principals or
representatives of such business entity, and (ii) Tenant shall have recourse
only to the assets of such business entity for the satisfaction of such
obligations and not against the assets of such officers, directors, trustees,
partners, joint venturers, members, owners, stockholders, principals or
representatives, except to the extent of their interests in the entity that is
Landlord. If Landlord is a natural person or persons, Tenant shall have recourse
only to the interest of such natural persons in the Property for the
satisfaction of the obligations of Landlord and shall not have recourse to any
other assets of such natural persons for the satisfaction of such obligations.
10.3 Indemnification of Landlord . Tenant shall hold harmless, indemnify
and defend Landlord, and Its employees, agents and contractors, with competent
counsel, from all liability, penalties, losses, damages, costs, expenses, causes
of action, claims and/or judgments arising by reason of any death, bodily
injury, personal injury or property damage (i) resulting from any cause or
causes whatsoever (other than the negligence or willful misconduct of Landlord
of which Landlord has had notice and a reasonable time to cure, but which
Landlord has failed to cure) occurring in or about or resulting from an
occurrence in or about the Premises, or (ii) resulting from the negligence or
willful misconduct of Tenant, its agents, employees and contractors, wherever
the same may occur, or (iii) resulting from an Event of Tenant's Default. The
provisions of this paragraph shall survive the expiration or sooner termination
of this Lease.
ARTICLE 11
Damage To Premises
11.1 Landlord's Duty to Restore. If the Premises are damaged by any peril
after the Commencement Date of this Lease, Landlord shall restore the Premises
unless the Lease is terminated by Landlord pursuant to paragraph 11.2 or by
Tenant pursuant to paragraph 11.3. All insurance proceeds available from the
fire and property damage insurance carried by Landlord pursuant to paragraph 9.2
shall be paid to and become the property of Landlord. If this Lease is
terminated pursuant to either paragraphs 11.2 or 11.3, then all insurance
proceeds available from insurance carried by Tenant which covers loss to
property that is Landlord's property or would become Landlord's property on
termination of this Lease shall be paid to and become the property of Landlord.
If this Lease is not so terminated, then upon receipt of the insurance proceeds
(if the loss is covered by insurance) and the issuance of all necessary
governmental permits, Landlord shall commence and diligently prosecute to
completion the restoration of the Premises, to the extent then allowed by Law,
to substantially the same condition in which the Premises were immediately prior
to such damage. Landlord's obligation to restore shall be limited to the
Premises and interior improvements constructed by Tenant but financed by
Landlord pursuant to the Interior Improvement Agreement as such improvements
existed upon completion thereof excluding any Leasehold Improvements, Trade
Fixtures and/or personal property constructed or installed by Tenant in the
Premises. To the extent that insurance proceeds recovered by Landlord from the
Insurance carried pursuant to paragraph 9.2A exceed the amount needed by
Landlord to discharge its restoration obligation pursuant to the immediately
preceding sentence, Landlord shall make such excess insurance proceeds available
to Tenant for the purpose of restoring interior improvements that were
constructed by Tenant and financed by Tenant pursuant to the Interior
Improvement Agreement, so that such improvements may be restored to
substantially the same condition existing as of the date such improvements were
initially completed.
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11.2 Landlord's Right to Terminate. Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage:
A. Either the Property or the Premises is damaged by an Insured
Peril to such an extent that the estimated cost to restore equals or exceeds
eighty percent (80%) of the then actual replacement cost thereof and there
remains less than three (3) years in the Lease Term; provided, however, that
Landlord may not terminate this Lease pursuant to this subparagraph 11.2A if
Tenant at the time of such damage has a then valid written option to extend the
Lease Term and Tenant exercises such option to extend the Lease Term within
fifteen (15) days after Tenant receives Landlord's notice of election to
terminate and such action results in there being more than three (3) years
remaining in the Lease Term (as it has been extended by the exercise of such
option);
B. Either the Property or the Premises is damaged by an Uninsured
Peril to such an extent that the estimated cost to restore exceeds two percent
(2%) of the actual replacement cost thereof; provided, however, that Landlord
may not terminate this Lease pursuant to this paragraph 11.2B if one or more
tenants of the Property agree in writing to pay the amount by which the cost to
restore the damage exceeds such amount and subsequently deposit such amount with
Landlord within thirty (30) days after Landlord has notified Tenant of its
election to terminate this Lease;
C. The Premises are damaged by any peril within twelve (12) months of
the last day of the Lease Term to such an extent that the estimated cost to
restore equals or exceeds an amount equal to six (6) times the Base Monthly Rent
then due; provided, however, that Landlord may not terminate this Lease pursuant
to this subparagraph 11.2C if Tenant, at the time of such damage, has a then
valid express written option to extend the Lease Term and Tenant exercises such
option to extend the Lease Term within fifteen (15) days following the date of
such damage; or
D. As used herein, the following terms shall have the following
meanings: (i) the term "Insured Peril" shall mean a peril actually insured
against for which the insurance proceeds paid or made available to Landlord are
sufficient (except for any "deductible" amount specified by such insurance) to
restore the Property under the then existing building codes to the condition
existing immediately prior to the damage; and (ii) the term "Uninsured Peril"
shall mean and include any peril not actually insured against, any peril
actually insured against but for which the insurance proceeds paid or made
available to Landlord are for any reason (except for any "deductible" amount
specified by such insurance) insufficient to restore the Property under then
existing building codes to the condition existing immediately prior to the
damage, and any peril actually insured against but for which the insurance
proceeds are not paid or made available to Landlord.
11.3 Tenant's Right to Terminate. If the Premises are damaged by any peril
and Landlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to paragraph 11.2, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord may be completed. Tenant shall have the right to terminate
this Lease in the event any of the following occurs, which right may be
exercised only by delivery to Landlord of a written notice of election to
terminate within thirty (30) days after Tenant receives from Landlord the
estimate of the time needed to complete such restoration:
A. The Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within two hundred seventy (270)
days after the date of such damage; or
B. The Premises are damaged by any peril within twelve (12) months of
the last day of the Lease Term and in the reasonable opinion of Landlord's
architect or construction consultant the restoration of the Premises cannot be
substantially completed within ninety (90) days after the date of such damage;
or
C. The Premises are not restored within eighteen (18) months
following the date of such damage; provided, however, that if at the time
restoration of the "shell" of the building in which the Premises are
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located is substantially completed (excluding Interior Improvements) Landlord
reasonably estimates that Landlord will not be able to complete restoration of
the Premises within such eighteen (18) month period, then at that time Landlord
may offer in writing to Tenant the option to terminate this Lease, and if Tenant
does not exercise such option to terminate the Lease so offered to Tenant by
Landlord, then Tenant may not thereafter elect to terminate this Lease pursuant
to this subparagraph 11.3C.
11.4 Abatement of Rent. In the event of damage to the Premises which does
not result in the termination of this Lease, the Base Monthly Rent and the
Additional Rent shall be temporarily abated commencing on the date of damage and
continuing through the period of restoration in proportion to the degree to
which Tenant's use of the Premises is impaired by such damage. Tenant shall not
be entitled to any compensation or damages from Landlord for loss of Tenant's
business or property or for any inconvenience or annoyance caused by such damage
or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision
2, and Section 1933, Subdivision 4, of the California Civil Code, and the
provisions of any similar law hereinafter enacted.
ARTICLE 12
Condemnation
12.1 Tenant's Termination Right. Tenant shall have the right to terminate
this Lease if, as a result of any taking by means of the exercise of the power
of eminent domain (including any voluntary sale or transfer by Landlord to any
condemnor under threat of condemnation), (i) ten percent (10%) or more of the
Premises is so taken, or (ii) there is a taking affecting the Common Area and,
as a result of such taking, Landlord cannot provide parking spaces within
reasonable walking distance of the Premises equal in number to at least ninety
percent (90%) of the number of spaces allocated to Tenant by paragraph 2.1,
whether by rearrangement of the remaining parking areas in the Common Area
(including construction of multi-dock parking structures or restriping for
compact cars where permitted by Law) or by alternative parking facilities on
other land. Tenant must exercise such right within a reasonable period of time,
to be effective on the date that possession of that portion of the Premises or
Common Area that is condemned is taken by the condemnor.
12.2 Restoration and Abatement of Rent. If any part of the Premises or the
Common Area is taken by condemnation and this Lease is not terminated, then
Landlord shall restore the remaining portion of the Premises and Common Area to
substantially the same condition in which the Premises and Common Area were
immediately prior to such taking, excluding any Leasehold Improvements, Trade
Fixtures and/or personal property constructed or installed by Tenant; provided,
however, that Landlord shall not be obligated to spend more for such restoration
than the amount of any condemnation award recovered by or pursuant to paragraph
12.3. Thereafter, except in the case of a temporary taking, (i) as of the date
possession is taken the Base Monthly Rent (but not any Additional Rent) shall be
reduced in the same proportion that the floor area of that part of the Premises
so taken (less any addition thereto by reason of any reconstruction) bears to
the original floor area of the Premises, and (ii) to the extent that Landlord is
obligated to undertake any restoration work as a result of such condemnation,
the Base Monthly Rent shall be further abated in proportion to the extent to
which such restoration work interferes with Tenant's ability to use that part of
the Premises which remains after the condemnation.
12.3 Temporary Taking. If any portion of the Premises is temporarily taken
for six (6) months or less, this Lease shall remain in effect and Tenant shall
be entitled to recover any condemnation award that is made for such taking and
shall be responsible for restoring the Premises to the condition existing
immediately prior to such temporary taking. If any portion of the Premises is
temporarily taken by condemnation for a period which exceeds six (6) months or
which extends beyond the natural expiration of the Lease Term, and such taking
materially and adversely affects Tenant's ability to use the Premises for the
Permitted Use, then Tenant shall have the right to terminate this Lease,
effective on the date possession is taken by the condemnor.
12.4 Division of Condemnation Award. Any award made as a result of any
condemnation of the Premises or the Common Area shall belong to and be paid to
Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
recover out of any condemnation award made for a taking of all or part of the
Premises an amount equal to the unamortized cost of all interior improvements
paid for by Tenant constructed pursuant to the Interior Improvement Agreement
and all
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Leasehold Improvements constructed by Tenant (amortized on a straight line basis
over the initial Lease Term for Interior Improvements, and over the period from
completion of construction until expiration of the Lease Term for Leasehold
Improvements); and provided further that Tenant shall be entitled to receive any
condemnation award that is made directly to Tenant for the following so long as
the award made to Landlord is not thereby reduced: (i) for the taking of
personal property or Trade Fixtures belonging to Tenant, (ii) for the
interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill, or (iv) for any temporary taking where this Lease is not
terminated as a result of such taking. The rights of Landlord and Tenant
regarding any condemnation shall be determined as provided in this Article, and
each party hereby waives the provisions of Section 1265.130 of the California
Code of Civil Procedure and the provisions of any similar law hereinafter
enacted allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Premises.
ARTICLE 13
Default And Remedies
13.1 Events of Tenant's Default. Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or any
Additional Rent when due and such failure is not cured within ten (10) days
after delivery of written notice from Landlord specifying such failure to pay;
or
B. Tenant shall have failed to perform any term, covenant, or
condition of this Lease except those requiring the payment of Base Monthly Rent
or Additional Rent, and Tenant shall have failed to cure such breach within
thirty (30) days after written notice from Landlord specifying the nature of
such breach, or if such breach could not reasonably be cured within said thirty
(30) day period, Tenant shall have failed to commence such cure within said
thirty (30) day period and thereafter continue with due diligence to prosecute
such cure to completion within such time period as is reasonably needed; or
C. Tenant shall have made a general assignment of its assets for the
benefit of its creditors; or
D. Tenant shall have sublet the Premises or assigned its interest in
the Lease in violation of the provisions contained in Article 14, whether
voluntarily or by operation of law; Landlord shall have notified Tenant in
writing that such Transfer constitutes a violation of the provisions contained
in Article 14, and Tenant does not cause such Transfer to be rescinded or
terminated and possession of the Premises affected by the Transfer recovered
from the Transferee within ninety (90) days after receipt of such notice; or
E. Tenant shall have permitted the sequestration or attachment of, or
execution on, or the appointment of a custodian or receiver with respect to, all
or any substantial part of the property of Tenant or any property essential to
the conduct of Tenant's business, and Tenant shall have failed to obtain a
return or release of such property within ninety (90) days thereafter or prior
to sale pursuant to such sequestration, attachment or levy, whichever is
earlier; or
F. A court shall have made or entered any decree or order with
respect to Tenant, or Tenant shall have submitted to or sought a decree or order
(or a petition or pleading shall have been filed in connection therewith) which:
(i) grants or constitutes (or seeks) an order for relief, appointment of a
trustee, or confirmation of a reorganization plan under the bankruptcy laws of
the United States; (ii) approves as properly filed (or seeks such approval of) a
petition seeking liquidation or reorganization under said bankruptcy laws or any
other debtor's relief law or statute of the United States or any state thereof;
or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant;
and such petition, decree or order shall have continued in effect for a period
of ninety (90) or more days; or
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G. Tenant shall have failed to deliver documents as required of it
pursuant to paragraph 15.4 or 15.7 within the time periods specified therein and
Tenant shall have failed to cure such default within ten (10) days after
Landlord has delivered to Tenant written notice that Tenant is in default of its
obligations to deliver such documents pursuant to either paragraph 15.4 or 15.7;
or;
H. An Event of Tenant's Default has occurred under the Building C
Lease (unless caused by a subtenant or assignee of the original Tenant under
this Lease and such original Tenant is using reasonable efforts to cause such
default to be cured) and, at the time Tenant is so in default, the Premises and
the real property leased to Tenant pursuant to the Building C Lease are both
owned of record by the same person or entity.
13.2 Landlord's Remedies. If an Event of Tenant's Default occurs, Landlord
shall have the following remedies, in addition to all other rights and remedies
provided by any Law or otherwise provided in this Lease, to which Landlord may
resort cumulatively or in the alternative:
A. Landlord may, at Landlord's election, keep this Lease in effect
and enforce by an action at law or in equity all of its rights and remedies
under this Lease, including (i) the right to recover the rent and other sums as
they become due by appropriate legal action, (ii) the right to make payments
required of Tenant or perform Tenant's obligations and be reimbursed by Tenant
for the cost thereof with interest at the Agreed Interest Rate from the date the
sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the
remedies of injunctive relief and specific performance to compel Tenant to
perform its obligations under this Lease.
B. Landlord may, at Landlord's election, terminate this Lease by
giving Tenant written notice of termination, in which event this Lease shall
terminate on the date set forth for termination in such notice. Any termination
under this subparagraph shall not relieve Tenant from its obligation to pay sums
then due Landlord or from any claim against Tenant for damages or rent
previously accrued or then accruing. In no event shall any one or more of the
following actions by Landlord, in the absence of a written election by Landlord
to terminate this Lease, constitute a termination of this Lease:
(1) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(2) Consent to any subletting of the Premises or assignment of
this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or
(3) Any other action by Landlord or Landlord's agents intended to
mitigate the adverse effects of any breach of this Lease by Tenant, including,
without limitation, any action taken to maintain and preserve the Premises or
any action taken to relet the Premises or any portions thereof, for the account
of Tenant and in the name of Tenant.
C. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including those
described by subparagraphs 13.2B(1), (2) and (3) immediately preceding, shall
constitute a termination of Tenant's right to possession unless Landlord gives
Tenant written notice of termination. Should Landlord not terminate this Lease
by giving Tenant written notice, Landlord may enforce all its rights and
remedies under this Lease, including the right to recover the rent as it becomes
duo under the Lease as provided in California Civil Code Section 1951.4 as in
effect on the Commencement Date of this Lease.
D. In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to damages in an amount as set forth in
California Civil Code Section 1951.2 as in effect on the Commencement Date of
this Lease. For purposes of computing damages pursuant to Section 1951.2, (i) an
interest rate equal to the Agreed Interest Rate shall be used where permitted
and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such
damages shall include without limitation:
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(1) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%); and
(2) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom, including, without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Premises; (ii) expenses for altering,
remodeling or otherwise improving the Premises for the purpose of reletting,
including installation of leasehold improvements (whether such installation be
funded by a reduction of rent, direct payment or allowance to a new tenant, or
otherwise); (iii) broker's fees, advertising costs and other expenses of
reletting the Premises; (iv) costs of carrying the Premises, such as taxes,
insurance premiums, utilities and security precautions; (v) expenses in retaking
possession of the Premises; and (vi) attorneys' fees and court costs incurred by
Landlord in retaking possession of the Premises and in releasing the Premises or
otherwise incurred as a result of Tenant's default.
E. Nothing in this paragraph shall limit Landlord's right to
indemnification from Tenant as provided in paragraph 7.2 and paragraph 10.3.
Any notice given by Landlord in order to satisfy the requirements of
subparagraphs 13.1A or B above shall also satisfy the notice requirements of
California Code of Civil Procedure Section 1161 regarding unlawful detainer
proceedings.
13.3 Waiver by Tenant of Certain Remedies. Tenant waives the provisions of
Sections 1932(1), 1941 and 1942 of the California Civil Code and/or any similar
or successor law regarding Tenant's right to terminate this Lease or to make
repairs and deduct the expenses of such repairs from the rent due under the
Lease.
13.4 Waiver. One party's consent to or approval of any act by the other
party requiring the first party's consent or approval shall not be deemed to
waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.5 Limitation on Exercise of Rights. At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval requested
of it by Tenant which Landlord would otherwise be obligated to give, and (ii)
Tenant may not exercise any option to extend, right to terminate this Lease, or
other right granted to it by this Lease which would otherwise be available to
it.
ARTICLE 14
Assignment And Subletting
14.1 By Tenant. The following provisions shall apply to any assignment,
subletting or other transfer by Tenant or any subtenant or assignee or other
successor in interest of the original Tenant (collectively referred to in this
paragraph as "Tenant"):
A. Tenant shall not do any of the following (collectively referred
to herein as a "Transfer"), whether voluntarily, involuntarily or by operation
of laws, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld or delayed: (i) sublet all or any part of the Premises
or allow it to be sublet, occupied or used by any person or entity other than
Tenant; (ii) assign its interest in this Lease; (iii) transfer any right
appurtenant to this Lease or the Premises; (iv) mortgage or encumber the Lease
(or otherwise use the Lease
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as a security device) in any manner; or (v) terminate or materially amend or
modify an assignment, sublease or other transfer that has been previously
approved by Landlord. Any Transfer so approved by Landlord shall not be
effective until Tenant has delivered to Landlord an executed counterpart of the
document evidencing the Transfer which (i) is in form approved by Landlord, (ii)
contains the same terms and conditions as stated in Tenant's notice given to
Landlord pursuant to subparagraph 14.1B, and (iii) contains the agreement of the
proposed transferee to assume all obligations of Tenant related to the Transfer
arising after the effective date of such Transfer and to remain jointly and
severally liable therefor with Tenant. Any attempted Transfer without Landlord's
consent shall be voidable at Landlord's option. Landlord's consent to any one
Transfer shall not constitute a waiver of the provisions of this paragraph 14.1
as to any subsequent Transfer nor a consent to any subsequent Transfer. No
Transfer, even with the consent of Landlord, shall relieve Tenant of its
personal and primary obligation to pay the rent and to perform all of the other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any person shall not be deemed to be a waiver by Landlord of any
provision of this Lease nor to be a consent to any Transfer.
B. Tenant shall give Landlord at least fifteen (15) days prior
written notice of any desired Transfer and of the proposed terms of such
Transfer including but not limited to (i) the name and legal composition of the
proposed transferee; (ii) a current financial statement of the transferee,
financial statements of the transferee covering the preceding three years if the
same exist, and (if available) an audited financial statement of the transferee
for a period ending not more than one year prior to the proposed effective date
of the Transfer, all of which statements are prepared in accordance with
generally accepted accounting principles; (iii) the nature of the proposed
transferee's business to be carried on in the Premises; (iv) all consideration
to be given on account of the Transfer; (v) a current financial statement of
Tenant; and (vi) such other information as may be reasonably requested by
Landlord. Tenant's notice shall not be deemed to have been served or given
until such time as Tenant has provided Landlord with all information reasonably
requested by Landlord pursuant to this subparagraph 14.1B. Tenant shall
immediately notify Landlord of any modification to the proposed terms of such
Transfer.
C. In the event that Tenant seeks to make any Transfer, then
Landlord, by giving Tenant written notice of its election within fifteen (15)
days after Tenant's notice of intent to Transfer has been deemed given to
Landlord, shall have the right to elect (i) to withhold its consent to such
Transfer, as permitted pursuant to subparagraph 14.1A, or (ii) to permit Tenant
to so assign the Lease or sublease such part of the Premises, in which event
Tenant may do so, but without being released of its liability for the
performance of all of its obligations under the Lease, and the following shall
apply:
(1) Subject to subparagraph 14.1C(5), if Tenant assigns its
interest in this Lease in accordance with this subparagraph 14.1C, then Tenant
shall pay to Landlord fifty percent (50%) of all consideration received by
Tenant over and above (i) the assignee's agreement to assume the obligations of
Tenant under this Lease and (ii) all Permitted Transfer Costs related to such
assignment.
(2) Subject to subparagraph 14.1C(5), if Tenant sublets all or
part of the Premises, then Tenant shall pay to Landlord fifty percent (50%) of
the positive difference, if any, between (i) all rent and other consideration
paid by the subtenant to Tenant, less (ii) all rent paid by Tenant to Landlord
pursuant to this Lease which is allocable to the area so sublet and all
Permitted Transfer Costs related to such sublease. Such amount shall be paid to
Landlord on the same basis, whether periodic or in lump sum, that such rent and
other consideration is paid to Tenant by its subtenant, within seven (7) days
after it is received by Tenant.
(3) Tenant's obligations under this subparagraph shall survive
any assignment or sublease. At the time Tenant makes any payment to Landlord
required by this subparagraph, Tenant shall deliver an itemized statement of the
method by which the amount to which Landlord is entitled was calculated,
certified by Tenant as true and correct. Landlord shall have the right to
inspect Tenant's books and records relating to the payments due pursuant to this
subparagraph. Upon request therefor, Tenant shall deliver to Landlord copies of
all bills, invoices or other documents upon which its calculations are based.
Landlord may condition its approval of any Transfer upon obtaining a
certification from both Tenant and the proposed transferee of all amounts that
are to be paid to Tenant in connection with such Transfer.
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(4) As used herein, the term "consideration' shall mean any
consideration of any kind received, or to be received, by Tenant as a result of
the Transfer, if such sums are related to Tenant's interest in this Lease or in
the Premises, including payments (in excess of the fair market value thereof)
for Tenant's assets, fixtures, leasehold improvements, inventory, accounts,
goodwill, equipment, furniture, general intangibles and any capital stock or
other equity ownership interest in Tenant. As used in this subparagraph, the
term "Permitted Transfer Costs" shall mean (i) all reasonable leasing
commissions paid to third parties not affiliated with Tenant in order to obtain
the Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant
with respect to the Transfer in question, (iii) the cost of tenant improvements
installed for the use of the subtenant or assignee to the extent required by
such party as a condition to the Transfer, and (iv) any payments made by Tenant
to the transferee to induce it to enter into the Transfer (e.g., payment of
moving expenses).
(5) Notwithstanding anything to the contrary contained in the
foregoing, Landlord shall not participate in excess consideration received by
Tenant from an assignee or subtenant as provided for in subparagraphs 14.1C(1)
and 14.1C(2) unless such assignment or sublease occurs during an Option Term or,
in the case of a sublease, extends into an Option Term (in which latter event
Landlord shall be entitled to its share of the excess consideration paid during
the Option Term).
D. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or transfer in the
aggregate over the Lease Term of a controlling percentage of the capital stock
of Tenant, shall be deemed a voluntary assignment of Tenant's interest in this
Lease; provided, however, that the foregoing shall not apply to corporations the
capital stock of which is publicly traded. The phrase "controlling percentage"
means the ownership of and the right to vote stock possessing more than fifty
percent (50%) of the total combined voting power of all classes of Tenant's
capital stock issued, outstanding and entitled to vote for the election of
directors. If Tenant is a partnership, any withdrawal or substitution (whether
voluntary, involuntary or by operation of law, and whether occurring at one time
or over a period of time) of any partner(s) owning twenty-five percent (25%) or
more (cumulatively) of any interest in the capital or profits of the partnership
or the dissolution of the partnership, shall be deemed a voluntary assignment of
Tenant's interest in this Lease.
E. Notwithstanding anything contained in this paragraph 14.1, so
long as Tenant otherwise complies with the provisions of paragraph 14.1 Tenant
may enter into any one of the following transfers (a "Permitted Transfer")
without Landlord's prior written consent, and Landlord shall not be entitled to
receive any part of any excess rentals or other consideration resulting
therefrom that would otherwise be due to it pursuant to paragraph 14.C:
(1) Tenant may sublease all or part of the Premises or assign its
interest in this Lease to any corporation which controls, is controlled by, or
is under common control with the original Tenant to this Lease by means of an
ownership interest of more than fifty percent (50%);
(2) Tenant may assign its interest in the Lease to a corporation
which results from a merger, consolidation or other reorganization in which
Tenant is not the surviving corporation, so long as (i) Tenant demonstrates to
Landlord's reasonable satisfaction that the surviving corporation will have
sufficient creditworthiness to provide adequate assurance of future performance
of all of Tenant's obligations under this Lease, or (ii) the surviving
corporation has a net worth at the time of such assignment that is equal to or
greater than the net worth of Tenant immediately prior to such transaction; and
(3) Tenant may assign this Lease to a corporation which purchases
or otherwise acquires all or substantially all of the assets of Tenant, so long
as (i) Tenant demonstrates to Landlord's reasonable satisfaction that the
acquiring corporation will have sufficient creditworthiness to provide adequate
assurance of future performance of all of Tenant's obligations under this Lease,
or (ii) such acquiring corporation has a net worth at the time of such
assignment that is equal to or greater than the net worth of Tenant immediately
prior to such transaction.
14.2 By Landlord. Landlord and its successors in interest shall have the
right to transfer their interest in the Premises and the Property at any time
and to any person or entity. In the event of any such transfer, the
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Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, (i) shall be automatically
relieved, without any further act by any person or entity, of all liability for
the performance of the obligations of the Landlord hereunder which may accrue
after the date of such transfer, and (ii) shall be relieved of all liability for
the performance of the obligations of the Landlord hereunder which have accrued
before the date of transfer if its transferee agrees to assume and perform all
such obligations of the Landlord hereunder. After the date of any such transfer,
the term "Landlord" as used herein shall mean the transferee of such interest in
the Premises and the Property.
ARTICLE 15
General Provisions
15.1 Landlord's Right to Enter. Landlord and its agents may enter the
Premises immediately in case of emergency and otherwise only at such time as is
approved by Tenant which time of entry shall be within seven (7) days after
Landlord delivers written notice to Tenant requesting approval of a time to
enter, and Landlord may thereafter continue such entry for such reasonable
period of time as is necessary to accomplish Landlord's permitted purpose for
such entry. Landlord may so enter the Premises for the following purposes: (i)
inspecting the same; (ii) posting notices of non-responsibility, (iii) supplying
any service to be provided by Landlord to Tenant, (iv) showing the Premises to
prospective purchasers or mortgagees, (v) making necessary alterations,
additions or repairs, (vi) performing Tenant's obligations when Tenant has
failed to do so after written notice from Landlord, (vii) placing upon the
Premises ordinary "for sale" signs, (viii) responding to an emergency, and/or
(ix) during the last six (6) months of the Lease Term or at any time when there
is a Continuing Tenant Default, showing the Premises to prospective tenants and
placing upon the Premises ordinary "for lease" signs. For each of the aforesaid
purposes, Landlord may enter the Premises by means of a master key, and Landlord
shall have the right to use any and all means Landlord may deem necessary and
proper to open the doors of the Premises in an emergency. Any entry into the
Premises or portions thereof obtained by Landlord by any of said means or
otherwise shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
15.2 Surrender of the Premises. Immediately prior to the expiration or
upon the sooner termination of this Lease, Tenant shall remove all Tenant's
Trade Fixtures and other personal property, and shall vacate and surrender the
Premises to Landlord in the same condition as existed at the Commencement Date,
except for (i) reasonable wear and tear, (ii) damage caused by any peril or
condemnation, and (iii) contamination by Hazardous Materials for which Tenant is
not responsible pursuant to subparagraphs 7.2B or 7.2C. In this regard
reasonable wear and tear shall be construed to mean wear and tear caused to the
Premises by the natural aging process which occurs in spite of prudent
application of reasonable standards for maintenance, repair and janitorial
practices, and does not include items of neglected or deferred maintenance. If
Landlord so requests, Tenant shall, prior to the expiration or sooner
termination of this Lease, remove any Leasehold Improvements designated by
Landlord and repair all damage caused by such removal if such removal is
required pursuant to paragraph 5.2. If the Premises are not so surrendered at
the termination of this Lease, Tenant shall be liable to Landlord for all costs
incurred by Landlord in returning the Premises to the required condition, plus
interest on all costs incurred at the Agreed Interest Rate.
15.3 Holding Over. This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration of
the Lease Term shall not constitute a renewal or extension of the Lease or give
Tenant any rights in or to the Premises except as expressly provided in this
Lease. Any holding over after such expiration with the consent of Landlord shall
be construed to be a tenancy from month to month on the same terms and
conditions herein specified insofar as applicable except that Base Monthly Rent
shall be increased to an amount equal to one hundred twenty-five percent (125%)
of the Base Monthly Rent required during the last month of the Lease Term.
15.4 Subordination. The following provisions shall govern the relationship
of this Lease to any underlying lease, mortgage or dead of trust which now or
hereafter affects the Property, and any renewal, modification, consolidation,
replacement or extension thereof (a "Security Instrument"):
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A. This Lease is subject and subordinate to all Security Instruments
existing as of the Commencement Date. However, if any Lender so requires, this
Lease shall become prior and superior to any such Security Instrument.
B. At Landlord's election, this Lease shall become subject and
subordinate to any Security Instrument created after the Commencement Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed and the terms of this Lease shall not be
modified so long so Tenant in not in default and performs all of its obligations
under this Lease, unless this Lease is otherwise terminated pursuant to its
terms.
C. No subordination of this Lease to a Security Instrument pursuant
to subparagraphs 15.4A or 15.4B shall be effective until the holder of a
Security Instrument executes a subordination and non-disturbance agreement in
favor of Tenant by which the Lender agrees to be bound by the immediately
preceding sentence.
D. Tenant shall execute any document or instrument required by
Landlord or any Lender to make this Lease either prior or subordinate to a
Security Instrument, which may include such other matters as the Lender
customarily requires in connection with such agreements, including provisions
that (i) the Lender not be liable for any defaults on the part of Landlord
occurring prior to the time the Lender takes possession of the Premises in
connection with the enforcement of its Security Instrument; (ii) the Lender not
be liable for the performance of any obligations contained in the Interior
Improvement Agreement, for the completion of any improvements under construction
or required to be constructed by Landlord; (iii) recourse against the Lender is
limited to its interest in the Premises; (iv) any notices given by Tenant to
Landlord should also be delivered to the Lender; (v) Tenant shall attorn to any
purchaser at a foreclosure sale or a grantee designated in a deed in lieu of
foreclosure; (vi) the Lender shall not be bound by any rent which Tenant might
have paid in advance to any prior Landlord for a period in excess of one mouth;
(vii) the Lender shall not be bound by any agreement or modification of the
Lease made without the written consent of the Lender; and (viii) upon request,
Tenant shall enter into a new lease with Lender of the Premises upon the same
term and conditions as the Lease between Landlord and Tenant, which lease shall
cover any unexpired term of the Lease existing prior to a foreclosure, trustee's
sale, or conveyance in lieu of foreclosure. Tenant's failure to execute any
such document or instrument within ten (10) days after written demand therefor
shall constitute a default by Tenant. Tenant approves as reasonable the form of
subordination and non-disturbance agreement attached to this Lease as Exhibit
"D".
15.5 Tenant shall attorn (i) to any purchaser of the Premises or Property
at any foreclosure sale or private sale conducted pursuant to any security
instrument encumbering the Premises or the Property; (ii) to any grantee or
transferee designated in any deed given in lieu of foreclosure; or (iii) to the
lessor under any underlying ground lease should such ground lease be terminated.
15.6 Mortgagee Protection. In the event of any default on the part of the
Landlord, Tenant will give notice by registered mail to any Lender or lessor
under any underlying ground lease whose name has been provided to Tenant and
shall offer such Lender or lessor a reasonable opportunity to cure the default,
not to exceed thirty (30) days from the expiration of the time period granted to
Landlord to cure such default; provided, however, that if such Lender requires
additional time to cure a default on the part of Landlord or to obtain
possession of the Premises by power of sale or judicial foreclosure or other
appropriate legal proceedings if obtaining possession is necessary to effect a
cure, the Lender shall be granted such opportunity, provided that the Lender
gives reasonable assurances to Tenant that such default will be cured.
15.7 Estoppel Certificates and Financial Statements. At all times during
the Lease Term, Tenant agrees, following any request by Landlord, promptly to
execute and deliver to Landlord an estoppel certificate, (i) certifying that
this Lease is unmodified and in full force and effect or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect, (ii) stating the date to which the rent and other
charges are paid in advance, if any, (iii) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or,
if there are uncured defaults, specifying the nature of such defaults and (iv)
certifying such other information about the Lease as may be reasonably required
by Landlord. Tenant's failure to deliver an estoppel certificate within ten (10)
days after delivery of Landlord's request therefor
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shall be a conclusive admission by Tenant that, as of the date of the request
for such statement, (i) this Lease is unmodified except as may be represented by
Landlord in said request and is in full force and effect, (ii) there are no
uncured defaults in Landlord's performance, and (iii) no rent has been paid in
advance. At any time during the Lease Term Tenant shall, upon ten (10) days'
prior written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the twenty-four (24) month period
prior to the date of such most recent financial statement to any existing Lender
or to any potential Lender or buyer of the Property; provided, however, that if
Tenant is a corporation whose stock is publicly traded, Tenant may satisfy the
foregoing requirement by delivering to the appropriate parties copies of its
most recent annual report prepared to satisfy requirements of the federal
securities laws. Such statements shall be prepared in accordance with generally
accepted accounting principles and, if such is the normal practice of Tenant
shall be audited by an independent certified public accountant.
15.8 Force Majeure. Any prevention, delay or stoppage due to strikes,
lockouts, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of the party obligated to
perform (except financial inability) shall excuse the performance, for a period
equal to the period of any said prevention, delay, or stoppage, of any
obligation hereunder except the obligation of Tenant to pay rent or any other
sums due hereunder.
15.9 Notices. Any notice required or desired to be given regarding this
Lease shall be in writing and may be given by personal delivery, by facsimile
telecopy, by courier service, or by mail. A notice shall be deemed to have been
given (i) on the third (3rd) business day after mailing if such notice was
deposited in the United States mail, certified or registered, postage prepaid,
addressed to the party to be served at its address first above set forth, (ii)
when delivered if given by personal delivery, and (iii) in all other cases when
actually received. Either party may change its address by giving notice of same
in accordance with this paragraph.
15.10 Obligation to Act Reasonably. Whenever the consent or approval of a
party to this Lease is required to be obtained before the other party to this
Lease may take an action, such consent or approval shall not be unreasonably
withheld or delayed.
15.11 Corporate Authority. If Tenant is a corporation (or a partnership),
each individual executing this Lease on behalf of said corporation (or
partnership) represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of said corporation in accordance with the bylaws
of said corporation (or partnership in accordance with the partnership agreement
of said partnership) and that this Lease is binding upon said corporation (or
partnership) in accordance with its terms. If Tenant is a corporation, each of
the persons executing this Lease on behalf of Tenant does hereby covenant and
warrant that Tenant is a duly authorized and existing corporation, that Tenant
is qualified to do business in California and that the corporation has full
right and authority to enter into this Lease.
15.12 Additional Definitions. Any term that is given a special meaning by
a provision in this Lease shall have such meaning when used in this Lease or any
addendum or amendment hereto. As used herein, the following terms shall have the
following meanings:
A. Agreed Interest Rate. The term "Agreed Interest Rate" shall mean
that interest rate determined as of the time it is to be applied that is equal
to the lessor of (i) two percent (2%) in excess of the "prime rate", "reference
rate", or "base rate" established by Bank of America (or if Bank of America
shall cease to exist, by the commercial bank with its headquarters in California
that has the greatest net worth among commercial banks headquartered in
California) as it may be adjusted from time to time, or (ii) the maximum
interest rate permitted by law.
B. Common Area. The term "Common Area" shall mean all areas and
facilities within the Property that are not designated by Landlord for the
exclusive use of Tenant or any other lessee or other occupant of the Property,
including the parking areas, access and perimeter roads, pedestrian sidewalk,
landscaped areas, trash enclosures, recreation areas and the like.
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C. Law. The term "Law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any municipal, county, state, federal or other government
agency or authority having jurisdiction over the parties to this Lease or the
Premises, or both, in effect either at the Commencement Date of this Lease or
any time during the Lease Term, including, without limitation, any regulation,
order or policy of any quasi-official entity or body (e.g., board of fire
examiners, public utilities or special district).
D. Leasehold Improvements. The term "Leasehold Improvements" shall
mean all improvements, additions, alterations and fixtures installed in the
Premises by Tenant at its expense which are not Trade Fixtures.
E. Lender. The term "Lender" shall mean any beneficiary, mortgagee,
secured party, lessor, or other holder of any Security Instrument.
F. Private Restrictions. The term "Private Restrictions" shall mean
all recorded covenants, conditions and restrictions, reciprocal easement
agreements, and any other recorded instruments affecting the use of the Premises
as they may exist from time to time.
G. Trade Fixtures. The term "Trade Fixtures" shall mean anything
affixed to the Premises by Tenant at its expense for purposes of trade,
manufacture, ornament or domestic use (except replacement of similar work or
material originally installed by Landlord) which can be removed without injury
to the Premises unless such thing has, by the manner in which it is affixed,
become an integral part of the Premises; provided, however, that all of Tenant's
signs shall be Trade Fixtures regardless of how affixed to the Premises.
15.13 Miscellaneous. Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. The captions used in this Lease are for convenience only and shall not
be considered in the construction or interpretation of any provision hereof. Any
executed copy of this Lease shall be deemed an original for all purposes. This
Lease shall, subject to the provisions regarding assignment, apply to and bind
the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. If Tenant consists of more than one person or entity, then all members
of Tenant shall be jointly and severally liable hereunder. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning, and not strictly for or against either
Landlord or Tenant. When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership or corporation or joint
venture, and the singular includes the plural. The terms "shall", "will" and
"agree" are mandatory. The term "may" is permissive. When a party is required to
do something by this Lease, it shall do so at its sole cost and expense without
right of reimbursement from the other party unless specific provision is made
therefor. Where Tenant is obligated not to perform any act, Tenant is also
obligated to use reasonable efforts to restrain any others within its control
from performing said act, including Agents, invitees, contractors, and
subcontractors. Landlord shall not become or be deemed a partner nor a joint
venturer with Tenant by reason of the provisions of this Lease.
15.14 Termination by Exercise of Right. If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate thirty (30) days after the date the right to terminate is properly
exercised (unless another date is specified in that part of the Lease creating
the right, in which event the date so specified for termination shall prevail),
the rent and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination. This paragraph does not apply to a termination of this
Lease by Landlord as a result of a default by Tenant.
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15.15 Brokerage Commissions. Tenant warrants that is has not had any
dealings with any real estate brokers, leasing agents or salesmen, or incurred
any obligations for the payment of real estate brokerage commissions or finder's
fees which would be earned or due and payable by reason of the execution of this
Lease other than to the Retained Real Estate Brokers. Landlord shall be
responsible for the payment of any commission owed pursuant to a separate
written commission agreement between Landlord and Retained Real Estate Brokers
for the payment of the commission as a result of the execution of this Lease.
15.16 Entire Agreement. This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that neither
Landlord nor Landlord's agent(s) has made any representation or warranty as to
(i) whether the Premises may be used for Tenant's intended use under existing
Law or (ii) the suitability of the Premises or the Common Area for the conduct
of Tenant's business or the condition of any improvements located thereon.
Tenant expressly waives all claims for damage by reason of any statement,
representation, warranty, promise or other agreement of Landlord or Landlord's
agent(a), if any, not contained in this Lease or in any addendum or amendment
hereto. No subsequent change or addition to this Lease shall be binding unless
in writing and signed by the parties hereto.
15.17 Old Lease; Assumption. In consideration for Landlord's agreement to
enter into this Lease with Tenant in substantially the same form as the Original
Lease, Tenant hereby assumes FMC's obligations under the Original Lease,
including, without limitation, the obligation to restore the Premises pursuant
Section 5.6 of the Original Lease.
32.
<PAGE>
In Witness Whereof, Landlord and Tenant have executed this Lease with the
intent to be legally bound thereby, to be effective as of the Commencement Date
of this Lease.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
ATP Associates, L.P., a Delaware limited partnership United Defense L.P.,
a Delaware limited partnership
By: Menlo Equities Associates III Inc., a Delaware By: UDLP Holdings Corp., a Delaware corporation, its
corporation, Its General Partner General Partner
By: /s/ Henry D. Bullock By: /s/ Peter C. Woglom
-------------------------------- -----------------------------------------------
Its: President Printed
-------------------------------- Name: Peter C. Woglom
----------------------------------------------
Title: Vice-President and General Manager,
---------------------------------------------
Ground Systems Division-UDLP
----------------------------------------------------
</TABLE>
33.
<PAGE>
Exhibit "A"
1.
<PAGE>
Exhibit "B"
PLANS AND SPECIFICATIONS
FOR BUILDING "A"
[Intentionally Deleted]
1.
<PAGE>
Exhibit C
INTERIOR IMPROVEMENT AGREEMENT
(Building A)
This Interior Improvement Agreement is made part of that Lease dated for
reference purposes only April __, 1999 (the "Lease"), by and between ATP
Associates L.P., a Delaware limited partnership ("Landlord") and United Defense
L.P., a Delaware limited partnership ("Tenant") of approximately 68,708 square
feet of gross leaseable area located in that building commonly known as Building
A of Airport Technology Park, 2890 De La Cruz Boulevard, Santa Clara,
California.
Landlord and Tenant agree that the following terms are hereby added to the
Lease:
1. Definitions. As used herein and in the Lease, the following terms
shall have the following meanings:
A. Approved Plans. The term "Approved Plans" shall mean those final
plans, specifications and working drawings to be approved by Landlord.
B. Interior Improvements. The term "Interior Improvements" shall
mean those improvements described by the Approved Plans that Tenant has the
right to construct in the Premises pursuant to paragraph 2 hereof.
C. Interior Improvement Costs. The term "Interior Improvement
Costs" shall mean the following: (i) the total amount due pursuant to the
construction contract entered into by Tenant pursuant to subparagraph 2B hereof
to construct the Interior Improvements; (ii) the cost of all governmental
approvals, permits and fees required as a condition to the construction of the
Interior Improvements; (iii) all utility connection or use fees; (iv) fees of
architects, designers, or engineers for services rendered in connection with the
design and construction of the Interior Improvements; (v) Tenant's moving and
relocation costs incurred in connection with the consolidation of its employees
at the Premises over the twelve (12) months prior to the date hereof ("Tenant's
Relocation Costs") and (vi) the cost of payment and performance bonds obtained
to assure completion of the Interior Improvements. There shall be excluded from
Interior Improvement Costs the following, to the extent not included in the
construction contract with the Prime Contractor referred to in subparagraph 2B
hereof: (i) any fee for Landlord's review of Tenant's plans for the Interior
Improvements; (ii) temporary electricity used during the construction period in
connection with the construction of the Interior Improvements; and (iii) any
fees charged by Tenant or its agents or employees for supervising/reviewing the
construction of the Interior Improvements (excluding overhead and profits of
prime contractor).
D. Landlord's Interior improvement Allowance. The term "Landlord's
Interior Improvement Allowance" shall mean the maximum amount Landlord is
required to spend toward the payment of the Interior Improvement Costs, which
amount is equal to Three Hundred Ten Thousand Dollars ($310,000).
E. Substantially Completed. The Interior Improvements shall be
deemed to be "Substantially Completed" when (i) Prime Contractor has issued its
written certificate stating that such improvements have been substantially
completed in accordance with the Approved Plans therefor, (ii) electrified
office partitions are installed, and (iii) the Building Department of the City
of Santa Clara has completed its final inspection of such improvements and has
"signed off" the building inspection card approving such work as complete.
F. Prime Contractor. The term "Prime Contractor" shall mean _______.
2. Construction Of Interior improvements. Tenant shall have the right to
construct the Interior Improvements in accordance with the following:
1.
<PAGE>
A. Tenant warrants that the Interior Improvements shall be
constructed in a good and workmanlike manner substantially in accordance with
the Approved Plans (as modified by any change orders approved by Landlord and
Tenant pursuant to paragraph 3 hereof) and all Laws. All materials and
equipment furnished shall be fully paid for and be free of liens, chattel
mortgages, and security interests of any kind.
B. The Interior Improvements shall be constructed by Prime
Contractor pursuant to a construction contract between Tenant and Prime
Contractor. Landlord shall have the right to review such form of construction
contract before it is executed. Once the construction contract between Prime
Contractor and Tenant has been executed, Tenant shall not materially amend,
modify or alter the responsibilities of Prime Contractor thereunder without
Landlord's written consent, except for change orders approved pursuant to
paragraph 3 hereof. In connection with the execution of such construction
contract, Tenant shall use reasonable efforts to provide that all construction
or equipment warranties or guarantees obtained by Tenant shall, to the extent
obtainable, provide that such warranties and guaranties shall also run for the
benefit of Landlord. Upon reasonable written advance request of Landlord,
Tenant shall inform Landlord of all written construction and equipment
warranties existing in favor of Tenant which affect the Interior Improvements.
Tenant shall cooperate with Landlord in enforcing such warranties and in
bringing any suit that may be necessary to enforce liability with regard to any
defects.
C. Tenant shall use reasonable efforts to commence construction of
the Interior Improvements as soon as reasonably practicable, and shall
thereafter continuously prosecute such construction to completion.
D. Tenant shall properly obtain, comply with and keep in effect all
permits, licenses and other governmental approvals which are required to be
obtained from governmental bodies in order to construct the Interior
Improvements. Upon reasonable written advance request, Tenant shall promptly
deliver copies of all such permits, licenses and approvals to Landlord.
E. Tenant shall be solely responsible for all aspects of the
construction of the Interior Improvements, including the development and design
thereof as set forth in the Approved Plans, the supervision of the work of
construction, the qualification, financial condition, and performance of all
architects, engineers, contractors, material suppliers, consultants, and the
accuracy of all applications for payment and the proper application of all
disbursement. Landlord is not obligated to supervise, inspect or inform Tenant
or any third party of any aspect of the construction of the Interior
Improvements. Any inspection or review by Landlord, is to determine whether
Tenant is properly discharging its obligations to Landlord and may not be relied
upon by Tenant or any third party. Landlord owes no duty of care to Tenant or
any third party to protect against or to inform Tenant or any third party of,
any negligence, faulty, inadequate or defective design or construction of the
Interior Improvements.
3. Changes to Approved Plans for Interior Improvements. Neither Landlord
nor Tenant shall have the right to order extra work or change orders with
respect to the Approved Plans or the construction of the Interior Improvements
without the prior written consent of the other. All extra work or change orders
requested by either Landlord or Tenant shall be made in writing, shall specify
the amount of delay or the time saved resulting therefrom, shall specify any
added or reduced cost resulting therefrom, and shall become effective and a part
of the Approved Plans once approved in writing by both parties. Notwithstanding
the foregoing, Tenant's failure to obtain Landlord's consent to an extra work or
change order shall not be an Event of Tenant's Default if Landlord would have
been required to consent to the change pursuant to the terms hereof.
4. Payment of Interior Improvement Costs. The Interior Improvement Costs
shall be paid as follows:
A. Landlord shall contribute to the payment of all Interior
Improvement Costs up to an amount equal to Landlord's Interior Improvement
Allowance. An amount equal to 40% of the Landlord's Interior Improvement
Allowance shall be applied to Tenant's Relocation Costs (the "Tenant Relocation
Allowance"). If, at the time of completion of all Interior Improvements, (1)
Tenant has not used the entire Tenant Relocation Allowance, Tenant shall receive
the remainder of the Tenant Relocation Allowance as a credit against Base
Monthly Rent for the first month of the Lease Term, or at Tenant's Option,
Tenant can use such amount for the Interior Improvement Costs at Building C and
(2) Tenant has not used the entire Landlord's Interior Improvement
2.
<PAGE>
Allowance (other than the amount allocated to the Tenant Relocation Allowance),
Tenant can use such amount for the Interior Improvement Costs at Building C.
Except as expressly provided in the preceding sentence, if any part of the
Landlord's Interior Improvement Allowance is not used by Tenant, or Tenant does
not qualify for a disbursement pursuant to the provisions of this paragraph 4
with the result that the entire allowance is not disbursed, there shall
nonetheless be no adjustment in the Base Monthly Rent due from Tenant pursuant
to the Lease. If the Interior Improvement Costs exceed the maximum amount of
Landlord's required contribution, then Tenant shall pay the entire amount of
such excess.
B. Landlord and Tenant acknowledge that the construction contract
Tenant will enter into for the construction of the interior Improvements will
provide for progress payments to Prime Contractor in stages as the work is
completed. Landlord shall pay the full amount of each such progress payment
until all of Landlord's Interior Improvement Allowance is expanded. Thereafter,
if the cost of the Interior Improvements exceeds the amount of Landlord's
required contribution for such improvements, then Tenant shall pay the rest of
the progress payments due to Prime Contractor. Landlord shall pay any progress
payment due from Landlord to Prime Contractor within thirty (30) days after
satisfaction of all of the conditions precedent to such progress payment by
Landlord that has been requested by Tenant which are set forth in subparagraph
4D and 4E hereof. If Landlord fails to pay any such amount when due, then
Tenant may (but without the obligation to do so) advance such funds on
Landlord's behalf, and Landlord shall be obligated to reimburse Tenant for the
amount of funds so advanced on its behalf and all costs incurred by Tenant in so
doing, including all interest at the Agreed Interest Rate.
C. If Tenant desires to obtain a disbursement from Landlord from the
Landlord's Interior Improvement Allowance for the purpose of paying Interior
Improvement Costs, Tenant shall submit to Landlord a written itemized statement,
signed by Tenant (an "Application for Payment") setting forth the following:
(i) a description of the construction work performed, materials supplied, and/or
costs incurred or due for which disbursement is requested; and (ii) the total
amount incurred, expended and/or due for each requested item less prior
disbursements; and (iii) the amount due to be paid by Landlord from Landlord's
Interior Improvement Allowance.
D. Landlord shall have no obligation to make any disbursement from
Landlord's Interior Improvement Allowance at any time that there is a Continuing
Tenant Default (as defined in paragraph 1.14 of the Lease), or there has
occurred an event, omission or failure of conditions which would constitute an
Event of Tenant's Default (as defined in paragraph 13.1 of the Lease) after
notice or lapse of time, or both. In addition, Landlord shall have the right to
condition any disbursement from Landlord's Interior Improvement Allowance upon
Landlord's receipt and approval of the following with respect to each
Application for Payment:
(1) The form of Application for Payment and the sufficiency of
the information contained therein;
(2) Bills and invoices and any other documents evidencing the
total amount expended, incurred, or due for any requested contribution to
Interior Improvement Costs;
(3) Evidence of Tenant's use of lien releases acceptable to
Landlord for payments or disbursements to any contractor, subcontractor,
materialmen, supplier, or lien claimant;
(4) Architects, inspectors and/or engineer's periodic
certification and the stage of construction that has been completed and its
conformance to the Approved Plans based upon any such architects, inspectors
and/or engineers periodic, physical inspections of the Premises and Interior
Improvements;
(5) Waivers and releases of mechanics' lien, stop notice claim,
equitable lien claim or other lien claim rights or lien bonds in form and amount
reasonably satisfactory to Landlord;
(6) Evidence of Tenant's compliance with its obligations pursuant
to paragraph 2 hereof;
(7) Any other document, requirement, evidence or information that
Landlord may reasonably request pursuant to any provision of this Interior
Improvement Agreement.
3.
<PAGE>
E. Tenant agrees that all disbursements made to Tenant by Landlord
from Landlord's Interior Improvement Allowance shall be used only for the
payment of Interior Improvement Costs and shall be applied as set forth, and for
the purposes described in, the relevant Application for Payment based upon which
the disbursement is made.
5. Punchlist. Within a reasonable period of time after the Interior
Improvements are Substantially Completed, Landlord, Tenant and Tenant's
architect shall together walk through and inspect such improvements so
completed, using reasonable efforts to discover all uncompleted or defective
construction. After such inspection has been completed. Tenant shall use
reasonable efforts to complete and/or repair all "punch list" items within
thirty (30) days thereafter.
6. Construction Warranty for the Interior Improvements. Tenant warrants
that the construction of the Interior Improvements will be performed in
accordance with the Approved Plans therefor and all Laws in a good and
workmanlike manner, and that all materials and equipment furnished will conform
to said plans and shall be new and otherwise of good quality. Tenant shall
promptly commence the cure of any breach of such warranty and complete such cure
with diligence at Tenant's cost and expense.
7. Ownership of the Interior Improvements. All of the Interior
Improvements which are constructed with funds of Landlord shall become the
property of Landlord upon installation and shall not be removed or altered by
Tenant. Any part of the Interior Improvements which are constructed by Landlord
with funds of Tenant shall become the property of Tenant upon installation and
Tenant shall have the right to depreciate and claim and collect investment tax
credits in such improvements; provided, however, that (i) Tenant shall not
remove or alter such improvements during the term of the Lease; (ii) such
improvements shall be surrendered to Landlord, and title to such improvements
shall vest in Landlord, at the expiration or earlier termination of the Lease
Term; and (iii) in no event shall Landlord have any obligation to pay Tenant for
the cost or value of such improvements. Notwithstanding the foregoing, Tenant
shall have the right to remove only the following kinds of Interior Improvements
so long as it repairs all damage caused by the installation thereof and returns
the Premises to the condition existing prior to the installation of such
Interior Improvements: (i) built-in cabinets, file drawers and bookcases; (ii)
computer room air conditioning; (iii) canteen equipment; (iv) office cubicle
systems; and (v) ornamental statues. If both Landlord and Tenant contribute to
the cost of constructing the Interior Improvements, Landlord and Tenant shall
agree in writing which of such improvements are to be constructed using
Landlord's funds (and therefore are Landlord's property) and which of them are
to be installed with Tenant's funds (and therefore are Tenant's property during
the Lease Term).
8. Documents. Within fifteen (15) days after receiving a written request
from Landlord, Tenant shall deliver to Landlord the most current version of the
following: (i) a complete and correct list showing the name, address and
telephone number of each contractor, subcontractor and principal materials
supplier engaged in connection with the construction of the Interior
Improvements, and the total dollar amount of each contract and subcontract
(including any changes) together with the amounts paid through the date of the
list; (ii) true and correct copies of all executed contracts and subcontracts
identified in the list described in the immediately preceding clause, including
any changes; (iii) a construction progress schedule; and (iv) any update to any
item described in the preceding clauses which Tenant may have previously
delivered to Landlord. Tenant expressly authorizes Landlord to contact any
contractor, subcontractor or materials supplier to verify any information
disclosed in accordance with this paragraph. Within sixty (60) days after the
Interior Improvements have been Substantially Completed, Tenant shall cause the
following to be delivered to Landlord:
A. Statements from Tenant's architect in form reasonably
satisfactory to Landlord certifying that the Interior Improvements have been
completed substantially in accordance with the Approved Plans and all Laws;
B. A copy of all permanent certificates of occupancy and other
governmental approvals which may be received by Tenant with respect to the
construction of the Interior Improvements.
C. One (1) copy of the Approved Plans, one (1) copy of each extra
work or change order, and one (1) copy of any "As-Built" plans and
specifications for the Interior Improvements, which Tenant may have elected to
cause to be prepared;
4
<PAGE>
D. One (1) copy of all warranties, guaranties, and operational
manuals relating to the Interior Improvements;
E. A copy of a recorded notice of completion relating to the
construction of the Interior Improvements.
9. Indemnity. Tenant agrees to indemnify and hold Landlord harmless from
and against all liabilities, claims, actions, damages, costs and expenses
(including attorneys' fees incurred by Landlord in protecting its interest from
the following) arising out of or resulting from construction of the Interior
Improvements, including any mechanics' liens, defective workmanship or materials
and any claim or cause of action of any kind by any party that Landlord is
liable for any act or omission committed or made by Tenant, its agents,
employees, or contractors in connection with the construction of the Interior
Improvements.
10. Effect of Agreement. In the event of any inconsistency between this
Agreement and the Lease, the terms of this Agreement shall prevail.
<TABLE>
<CAPTION>
AS TENANT: AS LANDLORD:
<S> <C>
United Defense L.P., ATP Associates, L.P., a Delaware limited partnership
a Delaware limited partnership
By: UDLP Holdings Corp., a Delaware corporation, its By: Menlo Equities Associates III Inc., a Delaware
General Partner corporation, Its General Partner
By: /s/ Peter C. Woglom By: /s/ Henry D. Bullock
--------------------------------------------------- ----------------------------------------
Printed Its: President
Name: Peter C. Woglom --------------------------------------
--------------------------------------------
Title: Vice-President and General Manager, Ground
-------------------------------------------
Systems Division, UDLP
-------------------------------------------
</TABLE>
5
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 DEFINITIONS.............................................. 1
1.1 Commencement Date......................................... 1
1.2 Rent Start Date........................................... 1
1.3 Lease Term................................................ 1
1.4 Property.................................................. 1
1.5 Premises.................................................. 1
1.6 Permitted Use............................................. 1
1.7 Tenant's Minimum Liability Insurance Coverage............. 2
1.8 Tenant's Allocated Parking Stalls......................... 2
1.9 Retained Real Estate Brokers.............................. 2
1.10 Address for Notices....................................... 2
1.11 Lease..................................................... 2
1.12 Building C Lease.......................................... 2
1.13 Tenant's Allocated Share.................................. 2
1.14 Continuing Tenant Default................................. 2
1.15 Additional Definitions.................................... 2
ARTICLE 2 DEMISE AND ACCEPTANCE.................................... 3
2.1 Demise of Premises........................................ 3
2.2 Delivery and Acceptance of Possession..................... 3
2.3 Construction of Interior Improvements..................... 3
2.4 Options to Extend Lease Term.............................. 3
ARTICLE 3 RENT..................................................... 6
3.1 Base Monthly Rent......................................... 6
3.2 Additional Rent........................................... 6
3.4 Late Charge and Interest on Rent in Default............... 7
ARTICLE 4 USE OF PREMISES.......................................... 7
4.1 Limitation on Type........................................ 7
4.2 Compliance with Laws and Private Restrictions............. 8
4.3 Insurance Requirements.................................... 8
4.4 Outside Areas............................................. 9
4.5 Signs..................................................... 9
4.6 Rules and Regulations..................................... 9
4.7 Parking................................................... 9
4.8 Window Coverings.......................................... 10
</TABLE>
i
<PAGE>
Table of Contents
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
4.9 Outside Sales............................................. 10
ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS................ 11
5.1 Trade Fixtures............................................ 11
5.2 Leasehold Improvements.................................... 11
5.3 Alterations Required by Law............................... 12
5.4 Landlord's Improvements................................... 12
5.5 Liens..................................................... 13
ARTICLE 6 REPAIR AND MAINTENANCE................................... 14
6.1 Tenant's Obligation to Maintain........................... 14
6.2 Landlord's Obligation to Maintain......................... 14
6.3 Tenant's Obligation to Reimburse.......................... 15
6.4 Common Operating Expenses Defined......................... 16
6.5 Control of Common Area.................................... 17
6.6 Tenant's Negligence....................................... 17
ARTICLE 7 WASTE DISPOSAL AND UTILITIES............................. 18
7.1 Waste Disposal............................................ 18
7.2 Hazardous Materials....................................... 18
7.3 Utilities................................................. 20
7.4 Compliance with Governmental Regulations.................. 21
ARTICLE 8 REAL PROPERTY TAXES...................................... 21
8.1 Real Property Taxes Defined............................... 21
8.2 Tenant's Obligation to Reimburse.......................... 22
8.3 Taxes on Tenant's Property................................ 22
ARTICLE 9 INSURANCE................................................ 22
9.1 Tenant's Insurance........................................ 22
9.2 Landlord's Insurance...................................... 24
9.3 Tenant's Obligation to Reimburse.......................... 24
9.4 Release and Waiver of Subrogation......................... 24
ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY......... 25
10.1 Limitation on Landlord's Liability........................ 25
10.2 Limitation on Tenant's Recourse........................... 26
10.3 Indemnification of Landlord............................... 26
ARTICLE 11 DAMAGE TO PREMISES....................................... 26
11.1 Landlord's Duty to Restore................................ 26
</TABLE>
ii
<PAGE>
Table of Contents
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
11.2 Landlord's Right to Terminate............................. 27
11.3 Tenant's Right to Terminate............................... 28
11.4 Abatement of Rent......................................... 28
ARTICLE 12 CONDEMNATION............................................. 28
12.1 Tenant's Termination Right................................ 28
12.2 Restoration and Abatement of Rent......................... 29
12.3 Temporary Taking.......................................... 29
12.4 Division of Condemnation Award............................ 29
ARTICLE 13 DEFAULT AND REMEDIES..................................... 30
13.1 Events of Tenant's Default................................ 30
13.2 Landlord's Remedies....................................... 31
13.3 Waiver by Tenant of Certain Remedies...................... 32
13.4 Waiver.................................................... 33
13.5 Limitation on Exercise of Rights.......................... 33
ARTICLE 14 ASSIGNMENT AND SUBLETTING................................ 33
14.1 By Tenant................................................. 33
14.2 By Landlord............................................... 36
ARTICLE 15 GENERAL PROVISIONS....................................... 36
15.1 Landlord's Right to Enter................................. 36
15.2 Surrender of the Premises................................. 37
15.3 Holding Over.............................................. 37
15.4 Subordination............................................. 37
15.6 Mortgagee Protection...................................... 38
15.7 Estoppel Certificates and Financial Statements............ 38
15.8 Force Majeure............................................. 39
15.9 Notices................................................... 39
15.10 Obligation to Act Reasonably.............................. 39
15.11 Corporate Authority....................................... 39
15.12 Additional Definitions.................................... 39
15.13 Miscellaneous............................................. 40
15.14 Termination by Exercise of Right.......................... 41
15.15 Brokerage Commissions..................................... 41
15.16 Entire Agreement.......................................... 41
15.17 Old Lease; Assumption..................................... 41
</TABLE>
<PAGE>
An extra section break has been inserted above this paragraph. Do not delete
this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
1.
<PAGE>
Exhibit 10.7(c)
LEASE
BY AND BETWEEN
ATP ASSOCIATES L.P.
a Delaware limited partnership, as Landlord
and
UNITED DEFENSE L.P.
a Delaware limited partnership,
as Tenant
for
BUILDING C
<PAGE>
LEASE
(Building C)
This Lease, dated April __, 1999 for reference purposes only, is made
by and between ATP Associates L.P., a Delaware limited partnership ("Landlord"),
and United Defense L.P., a Delaware limited partnership ("Tenant").
Recitals
A. The Equitable Life Assurance Society of the United States
("Equitable") and FMC Corporation ("FMC") entered into a lease dated June 1,
1989 (the "Original Lease"), for the Premises (as defined below);
B. On or about August 11, 1995, Landlord acquired the fee simple
interest in certain real property, including the Premises, from Equitable and
succeeded to the interest of Equitable as Landlord under the Lease;
C. Tenant is now occupying the Premises pursuant to the Original
Lease, as if the Original Lease had been assigned by FMC to Tenant; and
D. Landlord and Tenant have agreed to enter into this new Lease
instead of extending the Old Lease, and Tenant has agreed to assume the
obligations under the Original Lease as if the Original Lease had been assigned
to Tenant and the term extended.
Agreement
Now Therefore, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
ARTICLE 1
Definitions
1.1 Commencement Date. The term "Commencement Date" shall mean
November 1, 1999.
1.2 Rent Start Date. The term "Rent Start Date" shall mean November
1, 1999 provided, however, that if the Landlord is unable to so deliver
possession of the Leased Premises to Tenant in the agreed condition on or before
the Commencement Date, rent shall not commence and Landlord shall not be in
default under this Lease, nor shall this Lease be void, voidable or cancelable
by Tenant until the lapse of ninety (90) days after the Commencement Date.
1.3 Lease Term. The Lease Term shall commence on the Commencement
Date and shall continue until the second (2nd) anniversary of the Rent Start
Date (unless the Lease Term is extended pursuant to paragraph 2.4 hereof).
1.4 Property. The term "Property" shall mean that real property
shown on the site plan attached hereto as Exhibit "A" and all improvements now
or hereafter located thereon, including, without limitation, the five (5)
buildings presently located thereon, the aggregate gross leaseable area of which
is approximately 295,271 square feet (the "Property Gross Leaseable Area"),
allocated among the five buildings as shown on the attached Exhibit "A";
provided, however, that Landlord may change the boundaries and composition of
the Property by removing or adding land and/or buildings and thereafter the term
"Property" shall refer to such real property so enlarged or reduced and the
amount of the "Property Gross Leaseable Area" shall be appropriately adjusted.
1.
<PAGE>
1.5 Premises. The term "Premises" shall mean the building structure
situated on the Property commonly known as Building C of Airport Technology
Park, 2830 De La Cruz Boulevard, Santa Clara, California, containing
approximately 86,785 square feet of gross leaseable area (the "Premises Gross
Leaseable Area") located as shown on Exhibit "A". Landlord and Tenant agree
that (i) all measurements of gross leaseable area contained in this lease are
conclusively agreed to be correct and binding upon the parties, even if a
subsequent measurement of any one of these areas determines that it is more or
less than the amount of area reflected in this Lease; and (ii) any such
subsequent determination that the area is more or less than shown in this Lease
shall not result in a change in any of the computations of rent, improvement
allowances, or other matters described in this Lease where gross leaseable area
is a factor.
1.6 Permitted Use. The term "Permitted Use" shall mean the use of
the Premises for (i) research and development, production, sales, and general
administrative offices and other legal uses incidental thereto, and (ii) any
other legal use first approved in writing by Landlord.
1.7 Tenant's Minimum Liability Insurance Coverage. The term
"Tenant's Minimum Liability Insurance Coverage" shall mean Two Million Five
Hundred Thousand Dollars ($2,500,000).
1.8 Tenant's Allocated Parking Stalls. The term "Tenant's Allocated
Parking Stalls" shall mean 338 parking stalls for the non-exclusive use of
Tenant.
1.9 Retained Real Estate Brokers. The term "Retained Real Estate
Brokers" shall mean Thomas Smith of CB Richard Ellis and Richard Kimball of
Colliers Parrish.
1.10 Address for Notices. The term "Address for Notices" shall mean
the following:
A. In the case of Landlord, such term shall mean c/o Menlo
Equities LLC, 525 University Avenue, Suite 100, Palo Alto, California 94301,
Attention: Henry D. Bullock/Richard J. Holmstrom.
B. In the case of Tenant, such term shall mean the address of
the Premises which is 2830 De La Cruz Boulevard, Santa Clara, California 95050.
1.11 Lease. The term "Lease" shall mean this printed lease, Exhibits
"A" (site plan), "B" (Approved Plans for Interior Improvements), "C" (Interior
Improvement Agreement), "D" (form of subordination agreement), all of which are
attached hereto and incorporated herein by this reference.
1.12 Building A Lease. The term "Building A Lease" shall mean that
lease dated as of April __, 1999 between Landlord and Tenant, pursuant to which
Tenant leases from Landlord that certain building identified as Building A on
the site plan attached hereto as Exhibit "A' and which contains approximately
68,708 square feet, the address of which is 2890 De La Cruz Boulevard, Santa
Clara, California.
1.13 Tenant's Allocated Share. The term "Tenant's Allocated Share"
shall mean one hundred percent (100%).
1.14 Continuing Tenant Default. A "Continuing Tenant Default" shall
be deemed to exist when an "Event of Tenant's Default" (as defined in paragraph
13.1) has occurred, and the underlying default or breach by Tenant of its
obligations which resulted in such Event of Tenant's Default has not been
completely cured.
1.15 Additional Definitions. As used in this Lease or any addendum
or amendment thereto, the following terms shall have the meanings set forth in
paragraph 15.12: "Agreed Interest Rate", "Common Area", "Law", "Leasehold
Improvements", "Lender", "Private Restrictions" and "Trade Fixtures".
2.
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ARTICLE 2
Demise And Acceptance
2.1 Demise of Premises. Landlord hereby leases to Tenant, and Tenant
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises together with (i) the non-exclusive right to use no more
than the number of Tenant's Allocated Parking Stalls within the Common Area
(subject to the limitations set forth in paragraph 4.7), and (ii) the non-
exclusive right to use the Common Area for ingress to and egress from the
Premises. Tenant's lease of the Premises shall be subject to (i) all Laws, (ii)
all Private Restrictions, easements, and other matters of public record, and
(iii) the reasonable and non-discriminatory rules and regulations from time to
time promulgated by Landlord pursuant to paragraph 4.6.
2.2 Delivery and Acceptance of Possession. Landlord shall deliver to
Tenant possession of the Premises on the Commencement Data in their presently
existing condition, broom clean. Tenant shall accept possession of the Premises
in its presently existing condition, "as-is" (except for latent defects in the
structural elements of the Premises), acknowledging that Tenant intends to do
renovation work and construct interior improvements pursuant to paragraph 2.3
hereof and the Interior Improvement Agreement attached as Exhibit "C".
2.3 Construction of Interior Improvements. Tenant shall construct
certain improvements for Tenant's use in the Premises pursuant to the terms of
the Interior Improvement Agreement executed concurrently with this Lease by
Landlord and Tenant and attached hereto an Exhibit "C".
2.4 Options to Extend Lease Term. Landlord hereby grants to Tenant
one option to extend the Lease Term for a period of two (2) years and one option
to extend the Lease Term for a period of three (3) years thereafter (each right
to extend referred to as the "Option" and each period referred to as the "Option
Term"), on the following terms and conditions:
A. Tenant must give Landlord notice in writing of its exercise
of the Option before the later to occur of (i) the two hundred fortieth (240th)
day before the date the initial Lease Term (or the then extended Lease Term, as
the case may be) would and but for said exercise, or (ii) the seventh (7th) day
following the establishment of the fair market rent for the Premises by
appraisal pursuant to subparagraph 2.4F if such appraisal process is commenced
pursuant to subparagraphs 2.4E and 2.4F.
B. Tenant may not exercise the option at any time that either of
the following is true: (i) a Continuing Tenant Default exists under this Lease
(unless caused by a subtenant of the original Tenant under this Lease and such
original Tenant is using reasonable efforts to cause such default to be cured);
or (ii) a Continuing Tenant Default exists under the Building A Lease (unless
caused by a subtenant or assignee of the original Tenant under this Lease and
such original Tenant is using reasonable efforts to cause such default to be
cured) and the same person or entity is the owner of record of both the Premises
and the real property leased pursuant to the Building A Lease.
C. All terms and conditions of this Lease shall apply during the
Option Term, except that the Base Monthly Rent for the Option Term shall be
determined as provided in subparagraph 2.4D below.
D. The Base Monthly Rent for the Option Term with respect to the
Premises shall be the ninety-five percent (95%) of the fair market rent for the
Premises for the Option Term on the terms contained in this Lease as of the
commencement of the Option Term, determined pursuant to subparagraphs 2.4E and
2.4F. For purposes of this Lease, the term "fair market rent for the Premises"
shall mean the projected going market rent for the Premises as of the
commencement of the Option Term in question, including a provision for periodic
increases of such rent during the Option Term (which increases shall be
established as part of such fair market rent), taking into account the value of
all improvements in the Premises, regardless of whether made by Landlord or
Tenant (except for those Leasehold Improvements that Tenant has the right to
remove at the expiration of the Lease Term), but in no event shall fair market
rent be less than the rent in effect during the immediately prior period.
3.
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E. Tenant may not exercise the Option in question unless Tenant has
delivered to Landlord a written request (a "Rent Quote Request") that Landlord
state in writing Landlord's opinion of the fair market rent for the Premises for
the upcoming Option Term in question, which Rent Quote Request may only be
delivered and shall only be effective if delivered (i) no sooner than fifteen
(15) months before the expiration of the Lease Term, and (ii) no later than
thirteen (13) months prior to the expiration of the Lease Term. After receipt
of a Rent Quote Request and no later than twelve (12) months prior to the
expiration of the Lease Term, Landlord shall deliver to Tenant a written
statement setting forth Landlord's opinion of the fair market rent for the
Premises for the Option Term in question (a "Landlord's Rent Quote"). For a
period of thirty (30) days following delivery to Tenant of Landlord's Rent Quote
(the "Negotiation Period"), Landlord and Tenant shall confer to attempt to reach
agreement upon the fair market rent for the Premises for the Option Term in
question. If Landlord and Tenant are unable to reach agreement in writing
within the Negotiation Period, for purposes of establishing the Base Monthly
Rent for the Option Term in question, the fair market rent for the Premises
shall be deemed to be the amount stated in Landlord's Rent Quote unless Tenant
delivers to Landlord during the Negotiation Period a written notice which states
the following: (i) Tenant requires that the fair market rent for the Premises
for the option Term in question be established by the appraisal process
described in subparagraph 2.4F; and (ii) the name, address, and qualifications
of the appraiser selected by Tenant for purposes of the appraisal process
described in subparagraph 2.4F ("Tenant's Appraisal Demand"). If Tenant so
timely delivers to Landlord a Tenant's Appraisal Demand, the Base Monthly Rent
for the Option Term in question shall be established based on the result of the
appraisal process described in subparagraph 2.4F.
F. If Tenant delivers to Landlord a Tenant's Appraisal Demand during
the Negotiation Period, then the fair market rent for the Premises shall be
determined by three (3) real estate appraisers, all of whom shall be members of
the American Institute of Real Estate Appraisers with not less than five (5)
years experience appraising real property (other than residential or
agricultural property) located in Santa Clara County, California, in accordance
with the following procedures:
(1) One of the appraisers shall be the appraiser identified in
Tenant's Appraisal Demand. Within ten (10) days of receipt of Tenant's
Appraisal Demand, Landlord shall select its appraiser and notify Tenant, in
writing, of the name, address and qualifications of an appraiser selected by it.
Failure by Landlord to select a qualified appraiser within said ten (10) day
period shall be deemed a waiver of its right to select a second appraiser on its
own behalf and Tenant shall select a second appraiser on behalf of Landlord
within five (5) days after the expiration of said ten (10) day period. Within
ten (10) days from the date the second appraiser shall have been appointed, the
two (2) appraisers selected by the parties shall appoint a third appraiser. If
the two appraisers fail to select a third qualified appraiser, the third
appraiser shall be selected by the American Arbitration Association at the
request of either party or, if there is then no American Arbitration Association
or if it refuses to perform this function, then at the request of either
Landlord or Tenant, the third appraiser shall be appointed by the then Presiding
Judge of the Superior Court of the State of California for the County of Santa
Clara.
(2) The three (3) appraisers so selected shall meet in San Jose,
California, not later than twenty (20) days following the selection of the third
appraiser. At said meeting the appraisers shall attempt to determine the fair
market rent for the Premises for the Option Term in question.
(3) If the appraisers are unable to complete their determinations
in one meeting, they may continue to consult at such times as they deem
necessary for a fifteen (15) day period from the date of their first meeting, in
an attempt to have at least two (2) of them agree. If, at the initial meeting or
at any time during said fifteen (15) day period, two (2) or more of the
appraisers agree on the fair market rent for the Premises, such agreement shall
be determinative and binding on the parties hereto, and the agreeing appraisers
shall, in simple letter form executed by the agreeing appraisers, forthwith
notify both Landlord and Tenant of the amount set by such agreement.
(4) If two (2) or more appraisers do not agree within said fifteen
(15) day period as set forth above, then each appraiser shall, within five (5)
days after the expiration of said fifteen (15) day period, submit his
independent appraisal in simple letter form to Landlord and Tenant stating his
determination of the fair market rent for the Premises for the Option Term in
question. Landlord and Tenant shall then determine the fair market rent for the
Premises for the Option Term by determining the average of the fair market rent
set by each of
4.
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the appraisers; provided, however, if the lowest appraisal is less than eighty-
five percent (85%) of the middle appraisal then such lowest appraisal shall be
disregarded, and/or if the highest appraisal is greater than one hundred fifteen
percent (115%) of the middle appraisal then such highest appraisal shall be
disregarded. If any appraisal in disregarded, then the average shall be
determined by computing the average set by the other appraisals that have not
been disregarded. For purposes of determining the relative amount of the
appraisals to implement the provisions of this subparagraph requiring that an
appraisal be disregarded if it is too high or too low, the amount of an
appraisal that calls for periodic rent increases based upon an index (e.g., the
Consumer Price Index) shall be determined by assuming that such index will
increase at the same average annual rate during the option period in question
that such index increased on an average annual basis during the five (5) year
period preceding the commencement of the option period in question.
(5) Each party shall bear the fees and expenses of the
appraisers selected by or for it, and the fees and expenses of the third
appraiser shall be borne fifty percent (50%) by Landlord and fifty percent (50%)
by Tenant.
ARTICLE 3
Rent
3.1 Base Monthly Rent. Commencing on the Rent Start Date and
continuing thereafter throughout the initial Lease Term, Tenant shall pay to
Landlord a monthly rent (which rent is referred to as the "Base Monthly Rent"),
which shall be the following:
A. The Base Monthly Rent for the period beginning on the Rent
Start Date and ending on the last day of the twelfth (12th) month of the Lease
Term is One Hundred Twenty-Four Thousand Nine Hundred Seventy Dollars ($124,970)
(i.e., $1.44 per square foot per month).
B. The Base Monthly Rent for the period beginning on the first
day of the thirteenth (13th) month of the Lease Term and ending on the last day
of the twenty-fourth (24th) month of the Lease Term is One Hundred Twenty-Nine
Thousand Three Hundred Ten Dollars ($129,310) (i.e., $1.49 per square foot per
month).
C. Base Monthly Rent payable during the second Option Term (if
such Option is exercised by Tenant) shall be payable as follows
(1) The Base Monthly Rent for the period beginning an the
first day of the twenty-fifth (25th) month of the Lease Term and ending on the
last day of the thirty-sixth (36th) month of the Lease Term is One Hundred
Thirty-Three Thousand Six Hundred Forty-Nine Dollars ($133,649) (i.e., $1.54 per
square foot per month).
(2) The Base Monthly Rent for the period beginning on the
first day of the thirty-seventh (37th) month of the Lease Term and ending on the
last day of the forty-eighth (48th) month of the Lease Term is One Hundred
Thirty-Seven Thousand Nine Hundred Eighty-Eight Dollars ($137,988) (i.e., $1.59
per square foot per month).
D. For purposes of applying the provisions of this paragraph
3.1, the term "month of the Lease Term" shall mean that period which begins on
that day of the calendar month in question which corresponds to the Rent Start
Date and which continues for thirty (30) or thirty-one (31) days until the day
of the next calendar month which precedes the day in that calendar month which
corresponds to the Rent Start Date. By way of example only, if it is assumed
that the Rent Start Date is November 1, 1999, then for purposes of this
paragraph 3.1 (i) the first month of the Lease Term would commence November 1
and end on November 30, 1999.
3.2 Additional Rent. Commencing on the Rent Start Date and
continuing thereafter throughout the Lease Term, Tenant shall pay, as additional
rent (the "Additional Rent"), (i) Tenant's share of Common Operating Expenses as
required by paragraph 6.3, (ii) Tenant's share of Real Property Taxes as
required by paragraph 8.2,
5.
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(iii) Landlord's share of the net consideration received by Tenant upon certain
assignments and sublettings as required by paragraph 14.1, (iv) any late charges
or interest due Landlord pursuant to paragraph 3.4, (v) Tenant's share of the
amortized cost of certain additional improvements as provided in paragraph 5.4,
and (vi) any other charges due Landlord pursuant to this Lease.
3.3 Payment of Rent. All rent required to be paid in monthly
installments shall be paid in advance on the first day of each calendar month
during the Lease Term. All rent shall be paid in lawful money of the United
States, without any abatement, deduction or offset whatsoever (except as
permitted by paragraphs 11.4 and 12.2), and without any prior demand therefor,
to Landlord at its address set forth above or at such other place as Landlord
may designate from time to time. Tenant's obligation to pay rent shall be
prorated as of the Rent Start Date and at expiration or earlier termination of
the Lease Term such that Tenant shall not be required to pay Base Monthly Rent
or Additional Rent for any period preceding the Rent Start Date or following the
expiration or earlier termination of the Lease Term (except in the case of a
termination of this Lease an a result of an Event of Tenant's Default).
3.4 Late Charge and Interest on Rent in Default. Tenant acknowledges
that the late payment by Tenant of any monthly installment of Base Monthly Rent
or any Additional Rent will cause Landlord to incur certain costs and expenses
not contemplated under this Lease, the exact amount of which are extremely
difficult or impractical to fix. Such costs and expenses will include, without
limitation, administration and collection costs and processing and accounting
expenses. Therefore, if any such Base Monthly Rent or Additional Rent is not
received by Landlord from Tenant within five (5) days after Landlord delivers
written notice to Tenant that such amount is delinquent, Tenant shall
immediately pay to Landlord a late charge equal to five percent (5%) of such
delinquent rent. Landlord and Tenant agree that this late charge represents a
reasonable estimate of such costs and expenses and is fair compensation to
Landlord for its loss suffered by Tenant's failure to make timely payment. In
no event shall this provision for a late charge be deemed to grant to Tenant a
grace period or extension of time within which to pay any rent or prevent
Landlord from exercising any right or remedy available to Landlord upon Tenant's
failure to pay any rent due under this Lease in a timely fashion, including the
right to terminate this Lease. If any rent remains delinquent for a period in
excess of thirty (30) days after Landlord delivers written notice to Tenant that
such amount is delinquent, in addition to such late charge, Tenant shall pay to
Landlord interest on any rent that is not paid when due at the Agreed Interest
Rate following the date such amount became due until paid.
ARTICLE 4
Use Of Premises
4.1 Limitation on Type. Tenant shall use the Premises solely for the
Permitted Use (as described in paragraph 1.6). Tenant shall not do or permit
anything to be done in or about the Premises or Common Area which will (i)
interfere with the rights of other occupants of the Property, (ii) cause
structural damage to the Premises and Tenant fails to promptly commence and
diligently pursue to completion the repair of such damage, or (iii) cause damage
to any part of the Premises or Property except to the extent reasonably
necessary for the installation of Tenant's equipment and trade fixtures and
Tenant fails to promptly commence and diligently pursue to completion the repair
of such damage. Tenant shall not operate any equipment within the Premises
which will (i) injure, vibrate or shake the Premises, (ii) overload existing
electrical system or other mechanical equipment servicing the Premises, or (iii)
impair the efficient operation of the sprinkler system or the heating,
ventilating or air conditioning ("HVAC") equipment servicing the Premises, or
(iv) damage, overload or corrode the sanitary sewer system. Tenant shall not
attach, hang or suspend anything from the ceiling, roof, walls or columns of the
Premises or set any load on the floor in excess of approved structural limits as
defined by Landlord's architect. Any dust, fumes, or waste products generated
by Tenant's use of the Premises shall be contained and disposed so that they do
not (i) create a fire or health hazard, (ii) damage the Premises, or (iii)
interfere with the businesses of other tenants of the Property. All noise or
odors generated by Tenant's use of the Premises shall be contained or muffled so
that they do not interfere with the businesses of other tenants of the Property.
Tenant shall not (i) change the exterior of the Premises (subject to Tenant's
right to install signs pursuant to paragraph 4.5), or (ii) install any equipment
or antennas on or make any penetrations of the exterior or roof of the Premises
without the prior written consent of Landlord. Tenant shall not commit nor
permit to be committed any waste in or about the Premises, and Tenant shall keep
the Premises in a neat, clean, attractive and orderly condition, free of any
objectionable noises, odors, dust or nuisances which may
6.
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disturb the quiet enjoyment of other tenants or occupants of the Property.
Notwithstanding the foregoing restrictions, the parties agree as follows:
A. Tenant may bring military fighting vehicles onto the first
floor of the Premises so long an (i) Tenant puts into place such reinforcing as
is reasonably necessary to upgrade the floor load capacity so that it will
accept such fighting vehicles; and (ii) Tenant repairs any damage to the
Premises caused by the entry of such vehicles.
B. Tenant may install antennas, radio "dishes" or other
electronic equipment reasonably necessary for the conduct of Tenant's business
upon the roof of the Premises so long as (i) such installations are done in
compliance with all Laws and Private Restrictions; (ii) such installations are
accomplished in a manner which does not compromise the watertight integrity of
the roof; (iii) all damage to the Premises caused by such installation is
repaired by Tenant; and (iv) any such equipment is properly and effectively
screened from view in a manner reasonably acceptable to Landlord.
C. In the event Tenant desires to operate equipment within the
Premises that will or may overload existing mechanical, electrical, or other
systems, Tenant may do so only if it first installs, at its sole cost, all
necessary modifications, repairs or upgrades of existing systems so that such
equipment may be operated without overloading such systems as so modified by
Tenant.
4.2 Compliance with Laws and Private Restrictions. Tenant shall not
use or permit any person to use the Premises in any manner which violates any
Laws or Private Restrictions. Tenant shall abide by and promptly observe and
comply with all Laws and Private Restrictions and shall indemnify and hold
Landlord harmless from any liability resulting from Tenant's failure to do so.
4.3 Insurance Requirements. Tenant shall not use or permit any
person to use the Premises or Common Area in any manner which will cause a
cancellation of any Insurance policy covering the Premises. Tenant shall not
sell, or permit to be kept, used, or sold in or about the Premises any article
which may be prohibited by the standard form of fire insurance policy; provided,
however, that Tenant may bring military fighting vehicles onto the first floor
of the Premises as permitted pursuant to subparagraph 4.1A. Tenant shall comply
with all reasonable requirements of any insurance company, insurance
underwriter, or Board of Fire Underwriters which are necessary to maintain, at
reasonable rates, the insurance coverage carried by Landlord pursuant to this
Lease.
4.4 Outside Areas. No materials, supplies, storage tanks or
containers, equipment, finished products or semi-finished products, raw
materials, inoperable vehicles or articles of any nature shall be stored upon or
permitted to remain outside of the Premises except in fully fenced and screened
areas outside the Premises which have been designed for such purpose and have
been approved in writing by Landlord for such use by Tenant; provided, however,
that Tenant may bring military fighting vehicles onto the first floor of the
Premises as permitted pursuant to subparagraph 4.1A.
4.5 Signs. Tenant shall not place on any portion of the Premises or
the Property any sign, placard, lettering in or on windows, banner, displays or
other advertising or communicative material which is visible from the exterior
of the Premises without the prior written approval of Landlord. All such
approved signs shall strictly conform to all Laws and Private Restrictions and
shall be installed at the expense of Tenant. If Landlord so elects, Tenant
shall, at the expiration or sooner termination of this Lease, remove all signs
installed by it and repair any damage caused by such removal. Tenant shall at
all times maintain such signs in good condition and repair. Upon Tenant's
written request and at Tenant's cost and expense, Landlord shall remove both of
the Airport Technology Park monument signs located on De La Cruz Boulevard.
Subject to Landlord's prior written approval of Tenant's specific design plan,
(i) Tenant shall have the right to install a monument sign at the entrance to
the Premises, and at the two entrances to Airport Technology Park, and (ii)
Tenant shall have the right to install signs on the exterior of the Premises.
Approved signs installed by Tenant may be illuminated in compliance with the
provisions of applicable Laws and Private Restriction.
7.
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4.6 Rules and Regulations. Landlord may from time to time promulgate
reasonable and nondiscriminatory rules and regulations applicable to all
occupants of the Property for the care and orderly management of the Property
and the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there in a conflict between the
rules and regulations and any of the provisions of this Lease, the provisions of
this Lease shall prevail. Landlord shall not be responsible for the violation
by any other tenant of the Property of any such rules and regulations.
4.7 Parking. Tenant is allocated and shall have the non-exclusive
right to use (without charge in addition to the Base Monthly Rent) no more than
the number of parking spaces contained within the Property described in
paragraph 2.1 for its use and the use of its employees and invitees, the
location of which may be designated from time to time by Landlord but shall be
on the Property and within reasonable proximity to the Premises. Tenant shall
not at any time use or permit its employees or invitees to use more parking
spaces than the number so allocated to Tenant or to park or permit the parking
of its vehicles or the vehicles of others in any portion of the Property not
designated by Landlord as a non-exclusive parking area. Landlord shall not
oversubscribe the parking within the Property, and shall assure that the total
number of spaces committed to the non-exclusive use of all tenants of the
Property shall not exceed the total number of spaces within the Common Area. Of
the parking spaces allotted to Tenant pursuant to paragraph 2.1, Tenant shall
have the right to designate a reasonable number of such spaces as reserved
spaces for its executives, which shall not exceed ten percent (10%) of the total
of spaces and which shall be in immediate proximity to the Premises. If
Landlord grants to any other tenant the exclusive right to use any particular
parking space(s), neither Tenant nor its employees or invitees shall use such
spaces. Within ten (10) business days after written request therefor from
Landlord, Tenant shall furnish Landlord with a list of its and its employees
vehicle license numbers and Tenant shall thereafter notify Landlord of any
change in such list within five (5) days after each such change occurs. Tenant
shall have the right, at Tenant's option, to provide its employees with stickers
or other identification markers or tags to be affixed to or on the employees'
automobiles or other vehicles, evidencing the right of such employees to use the
parking areas. Such stickers shall be subject to prior review and approval by
Landlord, which shall not be unreasonably withheld or delayed. Tenant shall
furnish to Landlord a list of identifying numbers for the stickers distributed
from time to time by Tenant to its employees. If Tenant elects to use such
stickers as provided herein, Tenant shall not be obligated to furnish Landlord
with a list of vehicle license numbers for its employees, for as long as Tenant
maintains such sticker system of identification. Landlord reserves the right,
after having given Tenant reasonable notice, to have any vehicles owned by
Tenant or its employees or invitees utilizing parking spaces in excess of the
parking spaces allowed for Tenant's use to be towed away at Tenant's cost. All
trucks and delivery vehicles shall be (i) parked at the rear of the Premises,
(ii) loaded and unloaded in a manner which does not interfere with the
businesses of other occupants of the Property, and (iii) permitted to remain on
the Property only so long as is reasonably necessary to complete loading and
unloading. In the event Landlord elects or is required by any Law to limit or
control parking in the Property, whether by validation of parking tickets or any
other method of assessment, Tenant agrees to participate in such validation or
assessment program under such reasonable rules and regulations as are from time
to time established by Landlord, so long as such participation does not result
in any increase in costs to Tenant.
4.8 Window Coverings. To the extent Tenant elects to use window
coverings visible from the exterior of the Premises, Tenant shall use the same
window covering to cover all windows Tenant so elects to cover in the Premises
to maintain a consistent and uniform exterior appearance.
4.9 Outside Sales. Tenant shall not conduct or permit to be
conducted on any portion of the Common Area any sale of any kind, including (i)
any public or private auction, fire sale, going-out-of-business sale, distress
sale or other liquidation sale, or (ii) any so-called "flea market", open-air
market or any other similar activity. Notwithstanding the foregoing, Tenant
shall be allowed to conduct occasional sales outside of the Premises on that
part of the Common Area that is in close proximity to the Premises so long as
each of the following conditions is satisfied with respect to each such sale:
(i) Landlord is given at least two (2) business days prior written notice of the
date of any such sale; (ii) such sale does not violate any Laws; (iii) such sale
is conducted in a manner that does not interfere with the rights of other
occupants of the Property; (iv) Tenant provides all necessary security, cleans
up all debris, and repairs any damage caused by such sale; and (v) the purpose
of such sale is to permit employees of Tenant to purchase or to receive free of
charge property of Tenant.
8.
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ARTICLE 5
Trade Fixtures And Leasehold Improvements.
5.1 Trade Fixtures. Throughout the Lease Term, Tenant shall provide,
install, and maintain in good condition all Trade Fixtures required in the
conduct of its business in the Premises. All Trade Fixtures shall remain
Tenant's property.
5.2 Leasehold Improvements. The following provisions govern
Leasehold Improvements constructed by Tenant:
A. Tenant shall not construct any Leasehold Improvements or
otherwise alter the Premises without Landlord's prior approval if such action
results in the demolition, removal, or material alteration of existing
Improvements (including partitions, wall and floor coverings, ceilings, lighting
fixtures or other utility installations) and if the cost of such construction or
alteration exceeds Fifteen Thousand Dollars ($15,000) per work of improvement or
if the cost of Leasehold Improvements done, under construction, or for which
approval is sought during any calendar quarter exceeds Twenty-Five Thousand
Dollars ($25,000). With respect to any Leasehold Improvements which must be
approved by Landlord pursuant to the immediately preceding sentence, Tenant
shall not commence construction of such Leasehold Improvements until Landlord
shall have first approved the plans and specifications therefor, which approval
shall be deemed given if not denied in writing within ten (10) working days
after Landlord shall have received Tenant's request for such approval. In no
event shall Tenant make any alterations to the Premises which could
significantly affect the structural integrity or the exterior design of the
Premises without Landlord's prior approval.
B. All Leasehold Improvements requiring Landlord's approval
shall be installed by Tenant in substantial compliance with the approved plans
and specifications therefor. All construction undertaken by Tenant shall be done
in accordance with all Laws and in a good and workmanlike manner using materials
of good quality. Tenant shall not commence construction of any Leasehold
Improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, and (iii) if reasonably requested by Landlord, Tenant
shall have obtained contingent liability and broad form builders risk insurance
in an amount reasonably satisfactory to Landlord if there are any perils
relating to the proposed construction not covered by insurance carried pursuant
to Article 9. If Landlord so requests in writing with respect to Leasehold
Improvements requiring Landlord's prior approval, Tenant shall inform Landlord
of Tenant's scheduled date for commencement of construction at least five (5)
days prior to such date of commencement.
C. At all times during the Lease Term, (i) Tenant shall maintain
all plans and change orders prepared in connection with the construction of any
Leasehold Improvements which required a building permit or other governmental
approval, and (ii) Tenant shall provide to Landlord copies of such plans and
change orders (and, to the extent Tenant causes such to be prepared for its own
use, "As-Built" plans) at any time that Landlord requests copies thereof.
D. All Leasehold Improvements shall remain the property of
Tenant during the Lease Term. Tenant shall have the right to remove only the
following kinds of Leasehold Improvements so long as it repairs all damage
caused by the installation thereof and returns the Premises to the condition
existing prior to the installation of such Leasehold Improvements: (i) built-in
cabinets, file drawers and bookcases; (ii) computer room air conditioning; (iii)
canteen equipment; (iv) office cubicle systems; and (v) ornamental statues. At
the expiration or sooner termination of the Lease Term, all Leasehold
Improvements that Tenant does not remove shall be surrendered to Landlord as a
part of the realty and shall then become Landlord's property, and Landlord shall
have no obligation to reimburse Tenant for all or any portion of the value or
cost thereof. However, if Landlord so requires, at the expiration or earlier
termination of the Lease Term, Tenant shall remove any Leasehold Improvements
designated for removal by Landlord and shall restore the Premises to the
condition existing prior to the installation of such Leasehold Improvements to
the extent necessary to return the Premises to substantially the
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same condition that existed on the completion of the Interior Improvements
constructed pursuant to Exhibit "C", ordinary wear and tear excepted.
Notwithstanding the foregoing:
(1) Tenant shall only be required to remove Leasehold
Improvements for which either of the following is true: (i) such Leasehold
Improvements were not approved in writing by Landlord; or (ii) at the time
approval was given by Landlord, Landlord informed Tenant in writing that
Landlord would require that such Leasehold Improvements be removed at the
termination of the Lease Term.
(2) Tenant my cause interior partitions to be moved,
reconfigured, or removed altogether, or cause interior offices to be deleted or
added, all without the obligation to restore such partitions or interior offices
to any prior condition upon expiration or termination of the Lease.
5.3 Alterations Required by Law. Tenant shall make any alteration,
addition or change of any sort, whether structural or otherwise, to the Premises
that is required by any Law because of (i) a specific use or change of use made
of the Premises by Tenant (which alteration, addition or change is not generally
required to be made by owners or tenants of other properties similar to the
Premises), (ii) Tenant's application for any permit or governmental approval, or
(iii) Tenant's construction or installation of any Leasehold Improvements or
Trade Fixtures.
5.4 Landlord's Improvements. All fixtures, improvements or equipment
which are installed, constructed on or attached to the Property by Landlord at
its expense shall become a part of the realty and belong to Landlord. Tenant
shall pay additional rent in the event Landlord, in its sole discretion, elects
to make any of the following kinds of capital improvements to the Property: (i)
capital improvements required to be constructed in order to comply with any Law
not in affect or applicable to the Property as of the Commencement Date; (ii)
modification of existing or construction of additional capital improvements or
building service equipment for the purpose of reducing the consumption of
utility services or Common Operating Expenses of the Property; (iii) replacement
of capital improvements or building service equipment existing as of the
Commencement Date when required because of normal wear and tear; and (iv) the
amount of "deductibles" paid by Landlord for the restoration of any part of the
Property that has been damaged to the extent such "deductible" is not included
within Common Operating Expenses. With respect to any expenditure in excess of
Fifty Thousand Dollars ($50,000) for which Landlord seeks contribution pursuant
to this paragraph 5.4 from Tenant, prior to incurring such expense, Landlord
shall notify Tenant of the nature and estimated amount of such expenditure and,
if Tenant so requests, shall provide Tenant with such information upon which
such cost estimate is based for Tenant's approval. The amount of additional
rent Tenant is to pay with respect to each such capital improvement shall be
determined as follows:
A. Tenant shall have the option to pay in cash an amount equal
to Tenant's Allocated Share of all costs paid by Landlord to construct the
improvements in question fairly allocable to the Premises (including financing
costs) in cash within thirty (30) days after the improvement has been
substantially completed and Landlord has notified Tenant of the cost of such
improvement and the amount of Tenant's required contribution. If Tenant does not
exercise such option to pay such amount in cash, then the provisions of
subparagraph 5.4B shall apply.
B. All costs paid by Landlord to construct such improvement
(including financing costs) shall be amortized on a straight line basis over the
useful life of such improvement (determined in accordance with generally
accepted accounting principles) with interest on the unamortized balance at the
then prevailing market rate Landlord would pay if it borrowed funds to construct
such improvement from an institutional lender, and Landlord shall inform Tenant
of the monthly amortization payment required to so amortize such costs, and
shall also provide Tenant with the information upon which such determination is
made. As additional rent, Tenant shall pay an amount equal to Tenant's
Allocated Share of that portion of such monthly amortization payment fairly
allocable to the Promises (as reasonably determined by Landlord) for each month
after such improvement is completed until the first to occur of (i) the
expiration of the Lease Term (as the same may be extended), or (ii) the end of
the term over which such costs were amortized, which amount shall be due at the
same time the Base Monthly Rent is due.
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C. Notwithstanding anything contained in this paragraph 5.4, the
additional rent Tenant is to pay with respect to any modification of existing or
construction of additional capital improvements or building service equipment
for the purpose of reducing the consumption of utility expenses or Common
Operating Expenses of the Property shall not for any period exceed the actual
amount of savings in Additional Rent realized by Tenant as a result of such
modification or construction.
5.5 Liens. Tenant shall keep the Premises and the Property free from
any liens and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees or
contractors relating to the Premises. If any claim of lien is recorded, Tenant
shall bond against or discharge the same within thirty (30) days after the same
has been recorded against the Premises and/or the Property. Should any lien be
filed against the Premises or any action commenced affecting title to the
Premises, the party receiving notice of such lien or action shall immediately
give the other party written notice thereof.
ARTICLE 6
Repair And Maintenance
6.1 Tenant's Obligation to Maintain. Except as otherwise provided in
paragraph 6.2 and in Article 11 regarding the restoration of damage caused by
fire and other perils, Tenant shall, at all times during the Lease Term, clean,
keep, and maintain in good order, condition, and repair the Premises and every
part thereof, through regular inspections and servicing, including, but not
limited to, (i) all plumbing and sewage facilities (including all sinks,
toilets, faucets and drains), and all ducts, pipes, vents or other parts of the
HVAC or plumbing system, (ii) all fixtures, interior walls, floors, carpets and
ceilings, (iii) all windows, doors, entrances, plate glass, showcases and
skylights (including cleaning both interior and exterior surfaces), (iv) all
electrical facilities and all HVAC equipment and other mechanical systems
(including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust
equipment and systems), (v) any automatic fire extinguisher equipment in the
Premises, and (vi) the roof membrane (including any necessary resurfacing or
patching to preserve the membrane or to repair leaks except that Tenant shall
not be required to make any repair to the extent such repair is required because
of Landlord's repair or maintenance of the structural roof system). Tenant
shall replace any damaged or broken glass in the Premises (including all
interior and exterior doors and windows) with glass of the same kind, size and
quality. Tenant shall repair any damage to the Premises (including exterior
doors and windows) caused by vandalism or any unauthorized entry. Tenant shall
maintain continuously throughout the Lease Term a service contract for the
maintenance of all HVAC equipment serving the Premises with a licensed HVAC
repair and maintenance contractor, which contract provides for the periodic
inspection and servicing of the HVAC equipment at least once every sixty (60)
days during the Lease Term. Tenant shall also maintain continuously throughout
the Lease Term a service contract for the washing of all windows (both interior
and exterior surfaces) in the Premises with a contractor, which contract
provides for the periodic washing of all such windows on such basis as shall
keep the exterior appearance of the Premises in first class condition, but no
less frequently than once, every calendar year. If and when Landlord so
requests in writing, Tenant shall furnish Landlord with copies of all such
service contracts. All repairs and replacements required of Tenant shall be
promptly made with materials of good quality. If the work affects the
structural parts of the Premises or if the estimated cost of any item of repair
or replacement is in excess of Fifteen Thousand Dollars ($15,000), then Tenant
shall first obtain Landlord's written approval of the scope of work, plans
therefor, and materials to be used, except in the case of emergency in which
event Tenant shall within a reasonable period of time after performing the work,
notify Landlord of the scope of the work performed and the materials used, and
shall furnish Landlord with the plans therefor.
6.2 Landlord's Obligation to Maintain. Landlord, at its cost without
right of reimbursement from Tenant, shall be responsible for the maintenance,
repair, and replacement of the structural parts of the Premises (i.e.,
foundation, first and second story floor slab and second story floor deck, load-
bearing walls, and structural roof system, but excluding roof membrane) except
to the extent that (i) the same is necessitated by the wrongful or negligent
act or omission of Tenant, its subtenants, or their respective agents,
employees, contractors, or invitees, or (ii) reimbursement is permitted pursuant
to paragraph 5.4 hereof. Landlord at its cost without right of reimbursement
from Tenant, shall repair damage to interior improvements and Leasehold
Improvements that have been approved by Landlord pursuant to the terms hereof,
or damage to the roof membrane of the Premises if caused by the maintenance work
required to be performed by Landlord pursuant to the provisions of this
paragraph.
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Landlord shall repair, maintain, operate and replace when necessary the Common
Area, with such right of reimbursement from Tenant as is specified in paragraphs
5.4 and 6.3. The parties acknowledge that the air-conditioning units located on
the roof of the Premises were installed when the Building was constructed and
subsequently have not operated. Landlord agrees to make any repairs necessary to
put such units in good operating condition, if within the six month period
following the Commencement Date, Tenant notifies Landlord in writing of the need
for such repairs. Landlord shall not be responsible for repairs required by an
accident, fire or other peril except as otherwise required by Article 11, or for
damage caused to any part of the Property by any act, negligence or omission of
Tenant or its agents, contractors, employees or invitees. Landlord may engage
contractors of its choice to perform the obligations required of it by this
Article, and the necessity of any expenditure to perform such obligations shall
be at the sole discretion of Landlord.
6.3 Tenant's Obligation to Reimburse. As additional rent, commencing
on the Rent Start Date and continuing throughout the remainder of the Lease
Term, Tenant shall pay Tenant's Allocated Share of all Common Operating Expenses
fairly allocable to the Premises including (i) all Common Operating Expenses
paid with respect to the maintenance, repair, replacement and use of the
Premises and (ii) a proportionate share (based on the Premises Gross Leaseable
Area as a percentage of the Property Gross Leaseable Area) of all Common Area
Expenses which relate to Property in general and are not fairly allocable to any
one building on the Property. Landlord agrees that it shall not recover from
all tenants of the Property more than one hundred percent (100%) of the actual
Common Operating Expenses incurred by Landlord for the period in question. As
provided in paragraph 3.3, Tenant's obligation to pay Tenant's Allocated Share
of Common Operating Expenses fairly allocable to the Premises shall be prorated
as of the Rent Start Date and at the expiration or earlier termination of the
Lease Term, and if Tenant has paid any amount on account of Common Operating
Expenses relating to a period that is not within the Lease Term (e.g.,
prepayment of insurance premiums for one year), such amount shall be reimbursed
to Tenant in connection with such proration. Payment shall be made by whichever
of the following methods is from time to time designated by Landlord, and
Landlord may change the method of payment at any time so long as (i) Landlord
gives Tenant at least sixty (60) days prior written notice, and (ii) the method
is not changed more than once in any calendar year. Tenant shall pay such share
of the actual Common Operating Expenses incurred or paid by Landlord but not
theretofore billed to Tenant within thirty (30) days after receipt of a written
bill therefor from Landlord, on such periodic basis as Landlord shall designate,
but in no event more frequently than once a month. Alternatively, (i) Landlord
shall deliver to Tenant Landlord's reasonable estimate of the Common Operating
Expenses it anticipates will be paid or incurred for the calendar year in
question, (ii) during such calendar year, Tenant shall pay such share of the
estimated Common Operating Expenses in advance in monthly installments as
required by Landlord due with the installments of Base Monthly Rent, and (iii)
within ninety (90) days after the end of each calendar year, Landlord shall
furnish to Tenant a statement in reasonable detail of the actual Common
Operating Expenses paid or incurred by Landlord during the just ending calendar
year and thereupon there shall be an adjustment between Landlord and Tenant,
with payment to Landlord or credit by Landlord against the next installment of
Base Monthly Rent, as the case may require, within thirty (30) days after
delivery by Landlord to Tenant of said statement, so that Landlord shall receive
the entire amount of Tenant's share of all Common Operating Expenses for such
calendar year and no more. Tenant and its agents (including accountants) shall
have the right at its expense, exercisable upon reasonable prior written notice
to Landlord, to inspect at Landlord's office during normal business hours
Landlord's books and records as they relate to Common Operating Expenses. Such
inspection must be made within one hundred eighty (180) days of Tenant's receipt
of Landlord's annual statement for the same, and shall be limited to
verification of the charges contained in such statement. Tenant may not
withhold payment of such bill pending completion of such inspection.
6.4 Common Operating Expenses Defined. The term "Common Operating
Expenses" shall mean the sum of the following:
A. All costs and expenses paid or incurred by Landlord in doing
the following (including payments to independent contractors providing services
related to the performance of the following): (i) maintaining, cleaning, and
repairing the exterior surfaces (including painting of exterior surfaces of
buildings not more than once every 5 years) of all buildings located on the
Property; (ii) maintenance of the liability, fire and property damage insurance
covering the Property carried by Landlord pursuant to paragraph 9.2 (including
the payment of commercially reasonable "deductibles" and the prepayment of
premiums for coverage of up to one year); (iii) maintaining, repairing,
operating and replacing when necessary HVAC equipment, utility facilities and
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other building service equipment; (iv) providing utilities to the Common Area
(including lighting, trash removal and water for landscaping irrigation); (v)
complying with all applicable Laws and Private Restrictions; (vi) operating,
maintaining, repairing, cleaning, painting, restriping and resurfacing the
Common Area; (vii) replacement or installation of lighting fixtures, directional
or other signs and signals, irrigation systems, tress, shrubs, ground cover and
other plant materials, and all landscaping in the Common Area; and (viii)
depreciation and financing costs on maintenance and operating machinery and
equipment (if owned) and rental paid for such machinery and equipment (if
rented);
B. All additional costs and expenses incurred by Landlord with
respect to the operation, protection, maintenance, repair and replacement of the
Property which pursuant to generally accepted accounting principles would be
considered a current expense and not a capital expenditure;
C. That portion of all compensation (including benefits and
premium for workers' compensation and other insurance) paid to or on behalf of
employees of Landlord but only to the extent they are involved in the
performance of the work described by subparagraphs A and B above and that is
fairly allocable to the Property;
D. An additional amount equal to a commercially reasonable and
competitive management fee that would be charged by an independent third party
property manager for the management of the Property (except that Tenant's
Allocated Share of such management fee for any period shall not exceed two
percent (2%)of the Base Monthly Rent and Additional Rent payable by Tenant for
the same period); and
E. Notwithstanding anything contained herein, the term "Common
Operating Expenses" shall not include any of the following: (i) mortgage
principle payments; (ii) ground rent and other payments made pursuant to any
ground lease affecting the Property; (iii) the cost of refinancing any loan
Secured by the Property; (iv) interest and penalties imposed against Landlord
for late payments by Landlord; (v) legal fees incurred by Landlord in connection
with the negotiation or enforcement of, or litigation in connection with, any
lease affecting the Property; (vi) the cost of any paintings, sculptures, or
other art objects installed on the Property; (vii) any costs reimbursed to
Landlord by insurance or other third party payments that are not reimbursements
by tenants for their share of Common Operating Expenses; (viii) brokerage
commissions or other costs related to the leasing of space within the Property;
(ix) the cost of any tenant improvements installed for the exclusive use of any
other tenant of the Property.
6.5 Control of Common Area. Landlord shall at all times have
exclusive control of the Common Area. Landlord shall have the right, without
the same constituting an actual or constructive eviction and without entitling
Tenant to any abatement of rent, to: (i) close any part of the Common Area to
the minimum extent reasonably necessary in the reasonable opinion of Landlord's
counsel to prevent a dedication thereof or the accrual of any prescriptive
rights therein; (ii) temporarily close the Common Area to perform maintenance or
for any other reason deemed sufficient by Landlord; (iii) designate other
property outside the boundaries of the Property to become part of the Property;
(iv) construct multi-deck parking structures in any part of the Common Area; (v)
change the shape, size, location, number and extent of improvements on the
Common Area; (vi) select a third party to maintain and operate any of the Common
Area at any time Landlord determines that the best interests of the Property
will be served by having the Common Area maintained and operated by that third
party so long as the fees and charges of such third party are reasonable and
competitive with the fees of others in the marketplace providing the same
services; (vii) make changes to the Common Area including, without limitation,
changes in the location of driveways, parking spaces, parking areas, sidewalks
or the direction of the flow of traffic and the site of the Common Area; and/or
(viii) voluntarily change the address of the Property. Landlord agrees not to
change the name of Airport Technology Park without the prior consent of Tenant.
The use of the Common Area shall be subject to such reasonable regulation and
changes therein as Landlord shall make from time to time. Landlord shall not
exercise its rights to control the Common Area in a manner that would materially
interfere with Tenant's use of the Premises without first obtaining Tenant's
approval. Tenant shall keep the Common Area free and clear of all obstructions
created or permitted by Tenant. If in the opinion of Landlord unauthorized
persons are using any of the Common Area by reason of the presence of Tenant in
the Premises, Tenant, upon demand of Landlord, shall restrain such unauthorized
use by appropriate proceedings. Nothing herein shall affect the right of
Landlord at any time to remove such unauthorized person from the Common Area nor
to prohibit the use of the Common Area by
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unauthorized persons. In exercising any such rights described in this paragraph
6.5 regarding the Common Area, Landlord shall make a reasonable effort to
minimize any disruption to Tenant's business.
6.6 Tenant's Negligence. Anything in this Lease to the contrary
notwithstanding, Tenant shall pay for all damage to the Premises or the Property
caused by the negligent act or omission of Tenant, its employees, contractors,
or invitees, or by the failure of Tenant to discharge promptly its obligations
under this Lease, or to comply with the terms of this Lease, but only to the
extent such damage is not covered by insurance proceeds actually recovered by
Landlord. Tenant shall make payment within thirty (30) days after demand
therefor by Landlord.
ARTICLE 7
Waste Disposal And Utilities
7.1 Waste Disposal. Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are (i) fully fenced and
screened in compliance with all Private Restrictions, (ii) designed for such
purpose to be used either exclusively by Tenant or in common with other
occupants of the Property, as designated by Landlord, and (iii) first approved
by Landlord. All entrances to such outside trash enclosures shall be kept
closed, and waste shall be stored in such manner as not to be visible from the
exterior of such outside enclosures. Tenant shall cause all of its waste to be
regularly removed from the Property at Tenant's sole cost. Tenant shall keep
all fire corridors and mechanical equipment rooms in the Premises free and clear
of all obstructions at all times.
7.2 Hazardous Materials. Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Property:
A. Landlord hereby makes the following representations to Tenant
each of which is made to the best of Landlord's knowledge as of the Commencement
Date:
(1) The soil and ground water on or under the Property does
not contain Hazardous Materials in amounts which violate any Hazardous Materials
Laws to the extent that any governmental entity could require either Landlord or
Tenant to take any remedial action or impose any penalties with respect to such
Hazardous Materials.
(2) During Landlord's period of ownership, no litigation or
any administrative proceeding has been brought or threatened, nor any
settlements reached with any governmental or private party, concerning the
actual or alleged presence of Hazardous Materials on or about the Property or
any disposal, release or threatened release of Hazardous Materials in or about
the Property.
(3) During the time that Landlord has owned the Property,
Landlord has received no notice of (i) any violation, or alleged violation, of
any Hazardous Material Law that has not been corrected to the satisfaction of
the appropriate authority, (ii) any pending claims relating to the presence of
Hazardous Material on the Property, or (iii) any pending investigation by any
governmental agency concerning the Property relating to Hazardous Materials.
(4) The Property does not contain any (i) equipment
containing PCBs, or (ii) underground storage tanks.
B. Any handling, transportation, storage, treatment, disposal or
use of Hazardous Materials by Tenant and Tenant's agents, employees,
contractors, invitees or subtenants after the Commencement Date in or about the
Property shall strictly comply with all applicable Hazardous Materials Laws.
Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to
Landlord, and hold harmless Landlord from and against any and all liabilities,
losses, claims, damages, interest, penalties, fines, monetary sanctions,
attorneys' fees, experts' fees, court costs, remediation costs, investigation
costs, and other expenses which result from or arise in any manner whatsoever
out of the use, storage, treatment, transportation, release, or disposal of
Hazardous Materials on or about
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the Property by Tenant or Tenant's agents, employees, contractors, invitees or
subtenants after the Commencement Date.
C. If the presence of Hazardous Materials on the Property caused
or permitted by Tenant or Tenant's agents, employees, contractors, invitees or
subtenants after the Commencement Date results in contamination or deterioration
of water or soil resulting in a level of contamination greater than the levels
established, is acceptable by any governmental agency having Jurisdiction over
such contamination, then Tenant shall promptly take any and all action necessary
to clean up such contamination if required by Law or as a condition to the
issuance or continuing effectiveness of any governmental approval which relates
to the use of the Property or any part thereof. Tenant shall further be solely
responsible for, and shall defend, indemnify and hold Landlord and its agents
harmless from and against, all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with any removal,
clean-up and restoration work and materials required hereunder to return the
Property to its condition existing prior to the appearance of such Hazardous
Materials.
D. Landlord and Tenant shall each give written notice to the
other as soon as reasonably practicable of (i) any communication received from
any governmental authority concerning Hazardous Materials which relates to the
Property, and (ii) any contamination of the Property by Hazardous Materials
which constitutes a violation of any Hazardous Materials Law. Landlord and
Tenant each agree to keep such information confidential, except for (i)
disclosures that are approved by the other party, (ii) disclosures required by
Law or court order, (iii) disclosures to any environmental consultant, lender,
purchaser, prospective purchaser, attorneys for either Landlord or Tenant, or
brokers for either Landlord or Tenant, so long as an agreement of
confidentiality is obtained from a party to whom the disclosure is to be made,
and (iv) disclosures in connection with any litigation or administrative
proceeding in which either Landlord or Tenant is involved. Tenant and Tenant's
agents, employees, contractors, invitees or subtenants shall not bring Hazardous
Materials onto the Property without first obtaining the written consent of
Landlord; provided, however, Tenant may, without being required to obtain the
prior written consent of Landlord, use at the Premises in small quantities
office supplies, cleaning materials and other maintenance materials that are
customarily used in business offices, even though such supplies and materials
may fall within the definition of Hazardous Materials. At any time during the
Lease Term, Tenant shall, within five days after written request therefor
received from Landlord, disclose in writing all Hazardous Materials that are
being used by Tenant on the Property, the nature of such use, and the manner of
storage and disposal.
E. Landlord may cause testing wells to be installed on the
Property, and may cause the ground water to be tested to detect the presence of
Hazardous Material by the use of such tests as are then customarily used for
such purposes. Any such installation of wells or tests shall be done in a manner
which minimizes the interference with Tenant's use of the Premises. If Tenant so
requests, Landlord shall supply Tenant with copies of such test results. The
cost of such tests and of the installation, maintenance, repair and replacement
of such wells shall be paid by Tenant if such tests disclose the existence of
facts which give rise to liability of Tenant pursuant to its indemnity given in
subparagraph 7.2B or 7.2C, and Tenant's liability is established in a judicial
or administrative proceeding, or in an action for declaratory relief brought by
Landlord.
F. Landlord, at its sole cost, shall comply with all Hazardous
Materials Laws affecting the Property (without right of reimbursement from
Tenant) to the extent that (i) Landlord is legally obligated to do so by such
Laws, and (ii) such compliance (or the cost of such compliance) is not made the
responsibility of Tenant pursuant to subparagraph 7.2B or subparagraph 7.2C.
Landlord shall indemnify, defend upon demand with competent counsel, and hold
harmless Tenant from and against any and all liability for response costs
imposed upon Tenant by any governmental agency pursuant to the federal Law known
as "CERCLA" (more particularly identified in subparagraph 7.2G) and the
comparable California statute (commonly known as the Carpenter-Presley-Tanner
Hazardous Substances Account Act, California Health and Safety Code Section
25300 et seq.) that results from the presence of Hazardous Materials on the
Property not caused or contributed to by the use, storage, treatment, release or
disposal of Hazardous Materials on or about the Property by Tenant, its
subtenants, or their respective agents, employees, contractors, or invitees.
Notwithstanding the foregoing, the indemnity given by Landlord in the
immediately preceding sentence shall not apply with respect to liability caused
by any contamination of the Property by a Hazardous Material that is or has been
used, stored, treated, released or disposed of on the Property by Tenant, its
subtenants, or their respective agents, employees, contractors, or invitees
unless Tenant can prove such contamination was not caused or contributed to by
any of such parties.
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G. As used herein, the term "Hazardous Material," means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous Material," includes, without limitation,
asbestos, PCB's, petroleum and petroleum products, and any material or substance
which in (i) listed under Article 9 or defined as hazardous or extremely
hazardous pursuant to Article 11 of Title 22 of the California Administrative
Code, Division 4, Chapter 20, (ii) defined as a "hazardous waste" pursuant to
Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C.
(S)6901 et seq. (42 U.S.C. (S)6903), or (iii) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S)9601 et seq. (42 U.S.C.
19601). As used herein, the term "Hazardous Material Law" shall mean any
statute, law, ordinance, or regulation of any governmental body or agency
(including the U.S. Environmental Protection Agency, the California Regional
Water Quality Control Board, and the California Department of Health Services)
which regulates the use, storage, release or disposal of any Hazardous Material.
H. The obligations of Landlord and Tenant under this paragraph
7.2 shall survive the expiration or earlier termination of the Lease Term. The
rights and obligations of Landlord and Tenant with respect to issues relating to
Hazardous Materials are exclusively established by this paragraph 7.2. In the
event of any inconsistency between any other part of this Lease and this
paragraph 7.2, the terms of this paragraph 7.2 shall control.
7.3 Utilities. Tenant shall promptly pay, as the same become due,
all charges for water, gas, electricity, telephone, sewer service, waste pick-up
and any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, standby fees,
and (ii) penalties for discontinued or interrupted service.
7.4 Compliance with Governmental Regulations. Landlord and Tenant
shall comply with all rules, regulations and requirements promulgated by
national, state or local governmental agencies or utility suppliers concerning
the use of utility services, including any rationing, limitation or other
control. Landlord may voluntarily cooperate in a reasonable manner with the
efforts of all governmental agencies or utility suppliers in reducing energy or
other resource consumption. Tenant shall not be entitled to terminate this
Lease nor to any abatement in rent by reason of such compliance or cooperation.
Tenant agrees at all times to cooperate fully with Landlord and to abide by all
rules, regulations and requirements which Landlord may prescribe in order to
maximize the efficient operation of the HVAC system and all other utility
systems.
ARTICLE 8
Real Property Taxes
8.1 Real Property Taxes Defined. The term "Real Property Taxes" as
used herein shall mean (i) all taxes, assessments, levies, and other charges of
any kind or nature whatsoever, general and special, foreseen and unforeseen
(including all installments of principal and interest required to pay any
existing or future general or special assessments for public improvements,
services or benefits, and any increases resulting from reassessments or
resulting from a change in ownership or any other cause), now or hereafter
imposed by any governmental or quasi-governmental authority or special district
having the direct or indirect power to tax or levy assessments, which are levied
or assessed against, or with respect to the value, occupancy or use of, all or
any portion of the Property (as now constructed or as may at any time hereafter
be constructed, altered, or otherwise changed) or Landlord's interest therein,
the fixtures, equipment and other property of Landlord, real or personal, that
are an integral part of and located on the Property, the gross receipts, income,
or rentals from the Property, or the use of parking areas, public utilities, or
energy within the Property, (ii) all charges, levies or fees imposed by reason
of environmental regulation or other governmental control of the Property
(excluding costs and expenses for which Landlord is responsible pursuant to
subparagraph 7.2F), and (iii) all costs and fees (including attorneys' fees)
incurred by Landlord in contesting any Real Property Tax and in negotiating with
public authorities as to any Real Property Tax. If at any time during the Lease
Term the method of taxation or assessment of the Property prevailing as of the
Commencement Date shall be altered so that in lieu of or in addition to any Real
Property Tax described above there shall be levied, assessed or imposed (whether
by reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate or additional tax or charge (i)
on the value, use or
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occupancy of the Property, (ii) on or measured by the gross receipts, income, or
rentals from the Property, (iii) on Landlord's business of leasing the Property,
or (iv) computed in any manner with respect to the operation of the Property,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Property,
then only that part of such Real Property Tax that is fairly allocable to the
Property shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
8.2 Tenant's Obligation to Reimburse. As Additional Rent, Tenant
shall pay to Landlord Tenant's Allocated Share of all Real Property Taxes which
become due after the Rent Start Date and during the Lease Term which are fairly
allocable to the Premises, which include (i) all Real Property Taxes assessed
with respect to the value, use or occupancy of the Premises and the land beneath
it, and (ii) a proportionate share (based on the Premises Gross Leaseable Area
as a percentage of the Property Gross Leaseable Area) of all Real Property Taxes
assessed with respect to the Common Area or with respect to the Property in
general which are not fairly allocable to any one building on the Property.
Tenant shall pay its share of Real Property Taxes (i) within thirty (30) days
after being billed for the same by Landlord, or (ii) no later than ten (10) days
before such Real Property Tax becomes delinquent, whichever last occurs. If
requested by Tenant in writing within one year from receipt of a bill for
Tenant's Allocated Share of Real Property Taxes, Landlord shall furnish Tenant
with such evidence as is reasonably available to Landlord with respect to the
amount of any Real Property Tax which is part of such bill. Tenant may not
withhold payment of such bill pending receipt and/or review of such evidence.
Upon Landlord's election or if any Lender requires Landlord to impound Real
Property Taxes on a periodic basis during the Lease Term, then Tenant, on notice
from Landlord indicating this requirement, shall pay a sum of money toward its
liability under this Article to Landlord on the same periodic basis in
accordance with the Lender's requirements (if any). Landlord shall impound the
Real Property Tax payments received from Tenant in accordance with the
requirements of the Lender (if any). If any assessments are levied against the
Property, Landlord may elect either to pay the amount in full or to allow the
assessment to go to bond. If Landlord pays the assessment in full, Tenant shall
pay to Landlord each time payment of Real Property Taxes is made a sum equal to
that which would have been payable (as both principal and interest) had Landlord
allowed the assessment to go to bond. Notwithstanding anything to the contrary
contained in paragraphs 8.1 and 8.2, if there is an increase in Real Property
Taxes resulting from a "change in ownership" (as that term is defined in
California Revenue and Taxation Code Section 60 et seq.) which occurs prior to
the fourth (4th) anniversary of the Commencement Date, then Tenant shall not be
obligated to pay any such increase that results from such "change of ownership".
8.3 Taxes on Tenant's Property. Tenant shall pay before delinquency
any and all taxes, assessments, license fees and public charges levied, assessed
or imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises which become due during the Lease Term.
Tenant shall furnish Landlord with satisfactory evidence of these payments
within thirty (30) days after receipt of written request therefor from Landlord.
ARTICLE 9
Insurance
9.1 Tenant's Insurance. Tenant shall maintain insurance complying
with all of the following:
A. Tenant shall procure, pay for and keep in full force and
affect the following:
(1) Commercial general liability insurance, including
property damage, against liability for personal injury, bodily injury, death and
damage to property occurring in or about, or resulting from an occurrence in or
about, the Premises with combined single limit coverage of not less than the
amount of Tenant's Minimum Liability Insurance Coverage set forth in paragraph
1.8, which insurance shall contain a "contractual liability" endorsement
insuring Tenant's performance of Tenant's obligation to indemnify Landlord
contained in paragraph 10.3;
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(2) Plate-glass insurance, at actual replacement cost; and
(3) Fire and property damage insurance against loss caused by
fire, extended coverage perils including steam boiler insurance, sprinkler
leakage, if applicable, vandalism, malicious mischief and such other additional
perils as now are or hereafter may be included in a standard extended coverage
endorsement from time to time in general use in the county in which, the
Property is located, insuring Tenant's personal property, inventory, Trade
Fixtures and Leasehold Improvements within the Premises for the full actual
replacement cost thereof.
B. Where applicable and required by Landlord, each policy of
insurance required to be carried by Tenant pursuant to this paragraph (i) shall
name Landlord and such other parties in interest as Landlord designates as
additional insureds; (ii) shall be primary insurance which provides that the
insurer shall be liable for the full amount of the loss up to and including the
total amount of liability set forth in the declarations without the right of
contribution from any other insurance coverage of Landlord; (iii) shall be in a
form satisfactory to Landlord; (iv) shall be carried with companies reasonably
acceptable to Landlord; (v) shall provide that such policy shall not be subject
to cancellation, lapse or change except after at least thirty (30) days prior
written notice to Landlord; (vi) shall not have a "deductible" in excess of
$500,000 or such greater amount as is approved by Landlord; (vii) shall (to the
extent available) contain a waiver by the insurer of any right to subrogation
against Landlord, its agents, employees and contractors which might arise by
reason of any payment under such policy or by reason of any act or omission of
Landlord, its agents, employees or contractors; and (viii) shall contain a
"severability" clause. If Tenant has in force and affect a blanket policy of
liability insurance with the same coverage for the Premises as described above,
as well as other coverage of other premises and properties of Tenant, or in
which Tenant has some interest, such blanket insurance shall satisfy the
requirements hereof.
C. A certificate of each paid-up policy evidencing the insurance
requited to be carried by Tenant pursuant to this paragraph (appropriately
authenticated by the insurer), certifying that such policy has been issued,
providing the coverage required by this paragraph, and containing the provisions
specified herein, shall be delivered to Landlord prior to the time Tenant or any
of its contractors enters the Premises and upon renewal of such policies, but
not less than five (5) days prior to the expiration of the term of such
coverage. If Landlord's insurance advisor reasonably determines at any time
that the amount of coverage required for any policy of insurance Tenant is to
obtain pursuant to this paragraph is not adequate, then Tenant shall increase
such coverage for such insurance to such amount as Landlord's insurance advisor
reasonably deems adequate, not to exceed the level of coverage commonly carried
by comparable businesses similarly situated for such insurance; provided,
however, that Landlord may not require an adjustment pursuant to this sentence
more frequently than once every two (2) years during the Lease Term.
9.2 Landlord's Insurance. Landlord shall have the following
obligations and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and
property damage insurance in so-called "all risk" form insuring Landlord (and
such others as Landlord may designate) against loss of rents for a period of not
less than six, (6) months and from physical damage to the Premises with coverage
of not less than the full replacement cost of (i) the building of which the
Premises are a part, including the structural elements thereof and all
electrical, mechanical, plumbing, and other systems, and (ii) all Interior
Improvements constructed pursuant to the Interior Improvement Agreement attached
as Exhibit "C". Landlord may so insure the Premises separately, or may insure
the Premises with other buildings and improvements within the Property and/or
other property owned by Landlord which Landlord elects to insure together under
the same policy or policies. Such fire and property damage insurance, at
Landlord's election, (i) may be endorsed to cover loss caused by such additional
perils against which Landlord may elect to insure, including earthquake and/or
flood, (ii) shall contain commercially reasonable "deductibles" which, in the
case of earthquake and flood insurance, may be up to ten percent (10%) of the
replacement value of the property insured or such higher amount as is then
commercially reasonable, (iii) may provide coverage for loss of rents for a
period of up to twelve (12) months, and (iv) may contain additional endorsements
or coverage reasonably required by Landlord or any Lender, including an "agreed
amount" endorsement, demolition insurance (covering the cost of demolishing
damaged improvements or improvements required by Law to be demolished), and
difference in condition coverage. Landlord shall not be required to cause
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such insurance to cover any Trade Fixtures, Leasehold Improvements or any
inventory or other personal property of Tenant.
B. Landlord may maintain a policy or policies of commercial
general liability insurance insuring Landlord (and such others as are designated
by Landlord) against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Property, with combined single limit coverage in such amount as Landlord may
from time to time determine is reasonably necessary for its protection and with
commercially reasonable deductibles.
9.3 Tenant's Obligation to Reimburse. The cost of the insurance
carried by Landlord pursuant to paragraph 9.2 (and any commercially reasonable
"deductible" amount paid by Landlord in connection with the restoration of any
lose and excluded from the coverage of such insurance) shall be a Common
Operating Expense and Tenant shall pay its share thereof as provided in
paragraph 6.3. However, if Landlord's insurance rates for the Premises are
increased at any time during the Lease Term as a result of the nature of
Tenant's use of the Premises, Tenant shall reimburse Landlord for the full
amount of such increase immediately upon receipt of a bill from Landlord
therefor.
9.4 Release and Waiver of Subrogation. The parties hereto release
each other, and their respective agents and employees, from any liability for
injury to any person or damage to property that is caused by or results from any
risk insured against under any valid and collectible insurance policy carried by
either of the parties which contains a waiver of subrogation by the insurer and
is in force at the time of such injury or damage, subject to the following
limitations: (i) the foregoing provisions shall not apply to the commercial
general liability insurance described by subparagraph 9.1A and 9.1B; and (ii)
such release shall apply to liability resulting from any risk insured against or
covered by self-insurance maintained or provided by Tenant to satisfy the
requirements of paragraph 9.1. This release shall be in effect only so long as
the applicable insurance policy contains a clause to the effect that this
release shall not affect the right of the insured to recover under such policy.
Each party shall use reasonable efforts to cause each insurance policy obtained
by it to provide that the insurer waives all right of recovery by way of
subrogation against the other party and its agents and employees in connection
with any injury or damage covered by such policy. However, if any insurance
policy cannot be obtained with such a waiver of subrogation, or if such waiver
of subrogation is only available at additional cost and the party for whose
benefit the waiver is to be obtained does not pay such additional cost, then the
party obtaining such insurance shall notify the other party of that fact and
thereupon shall be relieved of the obligation to obtain such waiver of
subrogation rights from the insurer with respect to the particular insurance
involved.
ARTICLE 10
Limitation On Landlord's Liability And Indemnity
10.1 Limitation on Landlord's Liability. Landlord shall not be
liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any
abatement of rent, for any injury to Tenant, its agents, employees, contractors
or invitees, damage to Tenant's property, or loss to Tenant's business resulting
from any cause, including without limitation any (i) failure, interruption or
installation of any HVAC or other utility system or service; (ii) failure to
furnish or delay in furnishing any utilities or services when such failure or
delay is caused by Acts of God or the elements, labor disturbances of any
character, any other accidents or other conditions beyond the reasonable control
of Landlord; (iii) limitation, curtailment, rationing or restriction on the use
of water or electricity, gas or any other form of energy or any services or
utility serving the Premises; (iv) vandalism or forcible entry by unauthorized
persons; or (v) penetration of water into or onto any portion of the Premises or
the Common Area through roof leaks or otherwise. Notwithstanding the foregoing:
A. Subject to paragraph 9.4, Landlord shall be liable for any
such injury, damage or loss which is proximately caused by Landlord's gross
negligence or willful misconduct, of which Landlord has actual notice and a
reasonable opportunity to cure but which it fails to so cure.
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B. Tenant shall have the option to terminate this Lease upon
the occurrence of the following: (i) water, electricity, or other utility
service essential to the conduct of Tenant's business in the Premises is
interrupted or substantially impaired for a period of more than two hundred
seventy (270) consecutive days during which time the Premises are rendered
substantially unusable for the conduct of Tenant's business (a "Material
Interruption"); and (ii) the Material Interruption is not caused by the act or
omission of Tenant, its agents, employees or contractors.
10.2 Limitation on Tenant's Recourse. So long as the Landlord is a
corporation, trust, partnership, joint venture, unincorporated association or
other form of business entity, (i) the obligations of Landlord shall not
constitute personal obligations of the officers, directors, trustees, partners,
joint venturers, members, owners, stockholders, or other principals or
representatives of such business entity, and (ii) Tenant shall have recourse
only to the assets of such business entity for the satisfaction of such
obligations and not against the assets of such officers, directors, trustees,
partners, joint venturers, members, owners, stockholders, principals or
representatives, except to the extent of their interests in the entity that is
Landlord. If Landlord is a natural person or persons, Tenant shall have
recourse only to the interest of such natural persons in the Property for the
satisfaction of the obligations of Landlord and shall not have recourse to any
other assets of such natural persons for the satisfaction of such obligations.
10.3 Indemnification of Landlord. Tenant shall hold harmless,
indemnify and defend Landlord, and Its employees, agents and contractors, with
competent counsel, from all liability, penalties, losses, damages, costs,
expenses, causes of action, claims and/or judgments arising by reason of any
death, bodily injury, personal injury or property damage (i) resulting from any
cause or causes whatsoever (other than the negligence or willful misconduct of
Landlord of which Landlord has had notice and a reasonable time to cure, but
which Landlord has failed to cure) occurring in or about or resulting from an
occurrence in or about the Premises, or (ii) resulting from the negligence or
willful misconduct of Tenant, its agents, employees and contractors, wherever
the same may occur, or (iii) resulting from an Event of Tenant's Default. The
provisions of this paragraph shall survive the expiration or sooner termination
of this Lease.
ARTICLE 11
Damage To Premises
11.1 Landlord's Duty to Restore. If the Premises are damaged by any
peril after the Commencement Date of this Lease, Landlord shall restore the
Premises unless the Lease is terminated by Landlord pursuant to paragraph 11.2
or by Tenant pursuant to paragraph 11.3. All insurance proceeds available from
the fire and property damage insurance carried by Landlord pursuant to paragraph
9.2 shall be paid to and become the property of Landlord. If this Lease is
terminated pursuant to either paragraphs 11.2 or 11.3, then all insurance
proceeds available from insurance carried by Tenant which covers loss to
property that is Landlord's property or would become Landlord's property on
termination of this Lease shall be paid to and become the property of Landlord.
If this Lease is not so terminated, then upon receipt of the insurance proceeds
(if the loss is covered by insurance) and the issuance of all necessary
governmental permits, Landlord shall commence and diligently prosecute to
completion the restoration of the Premises, to the extent then allowed by Law,
to substantially the same condition in which the Premises were immediately prior
to such damage. Landlord's obligation to restore shall be limited to the
Premises and interior improvements constructed by Tenant but financed by
Landlord pursuant to the Interior Improvement Agreement as such improvements
existed upon completion thereof excluding any Leasehold Improvements, Trade
Fixtures and/or personal property constructed or installed by Tenant in the
Premises. To the extent that insurance proceeds recovered by Landlord from the
Insurance carried pursuant to paragraph 9.2A exceed the amount needed by
Landlord to discharge its restoration obligation pursuant to the immediately
preceding sentence, Landlord shall make such excess insurance proceeds available
to Tenant for the purpose of restoring interior improvements that were
constructed by Tenant and financed by Tenant pursuant to the Interior
Improvement Agreement, so that such improvements may be restored to
substantially the same condition existing as of the date such improvements were
initially completed.
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11.2 Landlord's Right to Terminate. Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage:
A. Either the Property or the Premises is damaged by an Insured
Peril to such an extent that the estimated cost to restore equals or exceeds
eighty percent (80%) of the then actual replacement cost thereof and there
remains less than three (3) years in the Lease Term; provided, however, that
Landlord may not terminate this Lease pursuant to this subparagraph 11.2A if
Tenant at the time of such damage has a then valid written option to extend the
Lease Term and Tenant exercises such option to extend the Lease Term within
fifteen (15) days after Tenant receives Landlord's notice of election to
terminate and such action results in there being more than three (3) years
remaining in the Lease Term (as it has been extended by the exercise of such
option);
B. Either the Property or the Premises is damaged by an
Uninsured Peril to such an extent that the estimated cost to restore exceeds two
percent (2%) of the actual replacement cost thereof; provided, however, that
Landlord may not terminate this Lease pursuant to this paragraph 11.2B if one or
more tenants of the Property agree in writing to pay the amount by which the
cost to restore the damage exceeds such amount and subsequently deposit such
amount with Landlord within thirty (30) days after Landlord has notified Tenant
of its election to terminate this Lease;
C. The Premises are damaged by any peril within twelve (12)
months of the last day of the Lease Term to such an extent that the estimated
cost to restore equals or exceeds an amount equal to six (6) times the Base
Monthly Rent then due; provided, however, that Landlord may not terminate this
Lease pursuant to this subparagraph 11.2C if Tenant, at the time of such damage,
has a then valid express written option to extend the Lease Term and Tenant
exercises such option to extend the Lease Term within fifteen (15) days
following the date of such damage; or
D. As used herein, the following terms shall have the following
meanings: (i) the term "Insured Peril" shall mean a peril actually insured
against for which the insurance proceeds paid or made available to Landlord are
sufficient (except for any "deductible" amount specified by such insurance) to
restore the Property under the then existing building codes to the condition
existing immediately prior to the damage; and (ii) the term "Uninsured Peril"
shall mean and include any peril not actually insured against, any peril
actually insured against but for which the insurance proceeds paid or made
available to Landlord are for any reason (except for any "deductible" amount
specified by such insurance) insufficient to restore the Property under then
existing building codes to the condition existing immediately prior to the
damage, and any peril actually insured against but for which the insurance
proceeds are not paid or made available to Landlord.
11.3 Tenant's Right to Terminate. If the Premises are damaged by any
peril and Landlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to paragraph 11.2, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord may be completed. Tenant shall have the right to terminate
this Lease in the event any of the following occurs, which right may be
exercised only by delivery to Landlord of a written notice of election to
terminate within thirty (30) days after Tenant receives from Landlord the
estimate of the time needed to complete such restoration:
A. The Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within two hundred seventy (270)
days after the date of such damage; or
B. The Premises are damaged by any peril within twelve (12)
months of the last day of the Lease Term and in the reasonable opinion of
Landlord's architect or construction consultant the restoration of the Premises
cannot be substantially completed within ninety (90) days after the date of such
damage; or
C. The Premises are not restored within eighteen (18) months
following the date of such damage; provided, however, that if at the time
restoration of the "shell" of the building in which the Premises are
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located is substantially completed (excluding Interior Improvements) Landlord
reasonably estimates that Landlord will not be able to complete restoration of
the Premises within such eighteen (18) month period, then at that time Landlord
may offer in writing to Tenant the option to terminate this Lease, and if Tenant
does not exercise such option to terminate the Lease so offered to Tenant by
Landlord, then Tenant may not thereafter elect to terminate this Lease pursuant
to this subparagraph 11.3C.
11.4 Abatement of Rent. In the event of damage to the Premises which
does not result in the termination of this Lease, the Base Monthly Rent and the
Additional Rent shall be temporarily abated commencing on the date of damage and
continuing through the period of restoration in proportion to the degree to
which Tenant's use of the Premises is impaired by such damage. Tenant shall not
be entitled to any compensation or damages from Landlord for loss of Tenant's
business or property or for any inconvenience or annoyance caused by such damage
or restoration. Tenant hereby waives the provisions of Section 1932,
Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code,
and the provisions of any similar law hereinafter enacted.
ARTICLE 12
Condemnation
12.1 Tenant's Termination Right. Tenant shall have the right to
terminate this Lease if, as a result of any taking by means of the exercise of
the power of eminent domain (including any voluntary sale or transfer by
Landlord to any condemnor under threat of condemnation), (i) ten percent (10%)
or more of the Premises is so taken, or (ii) there is a taking affecting the
Common Area and, as a result of such taking, Landlord cannot provide parking
spaces within reasonable walking distance of the Premises equal in number to at
least ninety percent (90%) of the number of spaces allocated to Tenant by
paragraph 2.1, whether by rearrangement of the remaining parking areas in the
Common Area (including construction of multi-dock parking structures or
restriping for compact cars where permitted by Law) or by alternative parking
facilities on other land. Tenant must exercise such right within a reasonable
period of time, to be effective on the date that possession of that portion of
the Premises or Common Area that is condemned is taken by the condemnor.
12.2 Restoration and Abatement of Rent. If any part of the Premises
or the Common Area is taken by condemnation and this Lease is not terminated,
then Landlord shall restore the remaining portion of the Premises and Common
Area to substantially the same condition in which the Premises and Common Area
were immediately prior to such taking, excluding any Leasehold Improvements,
Trade Fixtures and/or personal property constructed or installed by Tenant;
provided, however, that Landlord shall not be obligated to spend more for such
restoration than the amount of any condemnation award recovered by or pursuant
to paragraph 12.3. Thereafter, except in the case of a temporary taking, (i) as
of the date possession is taken the Base Monthly Rent (but not any Additional
Rent) shall be reduced in the same proportion that the floor area of that part
of the Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the Premises, and (ii) to
the extent that Landlord is obligated to undertake any restoration work as a
result of such condemnation, the Base Monthly Rent shall be further abated in
proportion to the extent to which such restoration work interferes with Tenant's
ability to use that part of the Premises which remains after the condemnation.
12.3 Temporary Taking. If any portion of the Premises is temporarily
taken for six (6) months or less, this Lease shall remain in effect and Tenant
shall be entitled to recover any condemnation award that is made for such taking
and shall be responsible for restoring the Premises to the condition existing
immediately prior to such temporary taking. If any portion of the Premises is
temporarily taken by condemnation for a period which exceeds six (6) months or
which extends beyond the natural expiration of the Lease Term, and such taking
materially and adversely affects Tenant's ability to use the Premises for the
Permitted Use, then Tenant shall have the right to terminate this Lease,
effective on the date possession is taken by the condemnor.
12.4 Division of Condemnation Award. Any award made as a result of
any condemnation of the Premises or the Common Area shall belong to and be paid
to Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
recover out of any condemnation award made for a taking of all or part of the
Premises an amount equal to the unamortized cost of all interior improvements
paid for by Tenant constructed pursuant to the Interior Improvement Agreement
and all
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Leasehold Improvements constructed by Tenant (amortized on a straight line basis
over the initial Lease Term for Interior Improvements, and over the period from
completion of construction until expiration of the Lease Term for Leasehold
Improvements); and provided further that Tenant shall be entitled to receive any
condemnation award that is made directly to Tenant for the following so long as
the award made to Landlord is not thereby reduced: (i) for the taking of
personal property or Trade Fixtures belonging to Tenant, (ii) for the
interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill, or (iv) for any temporary taking where this Lease is not
terminated as a result of such taking. The rights of Landlord and Tenant
regarding any condemnation shall be determined as provided in this Article, and
each party hereby waives the provisions of Section 1265.130 of the California
Code of Civil Procedure and the provisions of any similar law hereinafter
enacted allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Premises.
ARTICLE 13
Default And Remedies
13.1 Events of Tenant's Default. Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or any
Additional Rent when due and such failure is not cured within ten (10) days
after delivery of written notice from Landlord specifying such failure to pay;
or
B. Tenant shall have failed to perform any term, covenant, or
condition of this Lease except those requiring the payment of Base Monthly Rent
or Additional Rent, and Tenant shall have failed to cure such breach within
thirty (30) days after written notice from Landlord specifying the nature of
such breach, or if such breach could not reasonably be cured within said thirty
(30) day period, Tenant shall have failed to commence such cure within said
thirty (30) day period and thereafter continue with due diligence to prosecute
such cure to completion within such time period as is reasonably needed; or
C. Tenant shall have made a general assignment of its assets
for the benefit of its creditors; or
D. Tenant shall have sublet the Premises or assigned its
interest in the Lease in violation of the provisions contained in Article 14,
whether voluntarily or by operation of law; Landlord shall have notified Tenant
in writing that such Transfer constitutes a violation of the provisions
contained in Article 14, and Tenant does not cause such Transfer to be rescinded
or terminated and possession of the Premises affected by the Transfer recovered
from the Transferee within ninety (90) days after receipt of such notice; or
E. Tenant shall have permitted the sequestration or attachment
of, or execution on, or the appointment of a custodian or receiver with respect
to, all or any substantial part of the property of Tenant or any property
essential to the conduct of Tenant's business, and Tenant shall have failed to
obtain a return or release of such property within ninety (90) days thereafter
or prior to sale pursuant to such sequestration, attachment or levy, whichever
is earlier; or
F. A court shall have made or entered any decree or order with
respect to Tenant, or Tenant shall have submitted to or sought a decree or order
(or a petition or pleading shall have been filed in connection therewith) which:
(i) grants or constitutes (or seeks) an order for relief, appointment of a
trustee, or confirmation of a reorganization plan under the bankruptcy laws of
the United States; (ii) approves as properly filed (or seeks such approval of) a
petition seeking liquidation or reorganization under said bankruptcy laws or any
other debtor's relief law or statute of the United States or any state thereof;
or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant;
and such petition, decree or order shall have continued in effect for a period
of ninety (90) or more days; or
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G. Tenant shall have failed to deliver documents as required of
it pursuant to paragraph 15.4 or 15.7 within the time periods specified therein
and Tenant shall have failed to cure such default within ten (10) days after
Landlord has delivered to Tenant written notice that Tenant is in default of its
obligations to deliver such documents pursuant to either paragraph 15.4 or 15.7;
or;
H. An Event of Tenant's Default has occurred under the Building
A Lease (unless caused by a subtenant or assignee of the original Tenant under
this Lease and such original Tenant is using reasonable efforts to cause such
default to be cured) and, at the time Tenant is so in default, the Premises and
the real property leased to Tenant pursuant to the Building A Lease are both
owned of record by the same person or entity.
13.2 Landlord's Remedies. If an Event of Tenant's Default occurs,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by any Law or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:
A. Landlord may, at Landlord's election, keep this Lease in
effect and enforce by an action at law or in equity all of its rights and
remedies under this Lease, including (i) the right to recover the rent and other
sums as they become due by appropriate legal action, (ii) the right to make
payments required of Tenant or perform Tenant's obligations and be reimbursed by
Tenant for the cost thereof with interest at the Agreed Interest Rate from the
date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and
(iii) the remedies of injunctive relief and specific performance to compel
Tenant to perform its obligations under this Lease.
B. Landlord may, at Landlord's election, terminate this Lease
by giving Tenant written notice of termination, in which event this Lease shall
terminate on the date set forth for termination in such notice. Any termination
under this subparagraph shall not relieve Tenant from its obligation to pay sums
then due Landlord or from any claim against Tenant for damages or rent
previously accrued or then accruing. In no event shall any one or more of the
following actions by Landlord, in the absence of a written election by Landlord
to terminate this Lease, constitute a termination of this Lease:
(1) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(2) Consent to any subletting of the Premises or assignment
of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise;
or
(3) Any other action by Landlord or Landlord's agents
intended to mitigate the adverse effects of any breach of this Lease by Tenant,
including, without limitation, any action taken to maintain and preserve the
Premises or any action taken to relet the Premises or any portions thereof, for
the account of Tenant and in the name of Tenant.
C. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including those
described by subparagraphs 13.2B(l), (2) and (3) immediately preceding, shall
constitute a termination of Tenant's right to possession unless Landlord gives
Tenant written notice of termination. Should Landlord not terminate this Lease
by giving Tenant written notice, Landlord may enforce all its rights and
remedies under this Lease, including the right to recover the rent as it becomes
duo under the Lease as provided in California Civil Code Section 1951.4 as in
effect on the Commencement Date of this Lease.
D. In the event Landlord terminates this Lease, Landlord shall
be entitled, at Landlord's election, to damages in an amount as set forth in
California Civil Code Section 1951.2 as in effect on the Commencement Date of
this Lease. For purposes of computing damages pursuant to Section 1951.2, (i) an
interest rate equal to the Agreed Interest Rate shall be used where permitted
and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such
damages shall include without limitation:
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(1) The worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%); and
(2) Any other amount necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom, including, without limitation, the following: (i)
expenses for cleaning, repairing or restoring the Premises; (ii) expenses for
altering, remodeling or otherwise improving the Premises for the purpose of
reletting, including installation of leasehold improvements (whether such
installation be funded by a reduction of rent, direct payment or allowance to a
new tenant, or otherwise); (iii) broker's fees, advertising costs and other
expenses of reletting the Premises; (iv) costs of carrying the Premises, such as
taxes, insurance premiums, utilities and security precautions; (v) expenses in
retaking possession of the Premises; and (vi) attorneys' fees and court costs
incurred by Landlord in retaking possession of the Premises and in releasing the
Premises or otherwise incurred as a result of Tenant's default.
E. Nothing in this paragraph shall limit Landlord's right to
indemnification from Tenant as provided in paragraph 7.2 and paragraph 10.3.
Any notice given by Landlord in order to satisfy the requirements of
subparagraphs 13.1A or B above shall also satisfy the notice requirements of
California Code of Civil Procedure Section 1161 regarding unlawful detainer
proceedings.
13.3 Waiver by Tenant of Certain Remedies. Tenant waives the
provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code
and/or any similar or successor law regarding Tenant's right to terminate this
Lease or to make repairs and deduct the expenses of such repairs from the rent
due under the Lease.
13.4 Waiver. One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.5 Limitation on Exercise of Rights. At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval requested
of it by Tenant which Landlord would otherwise be obligated to give, and (ii)
Tenant may not exercise any option to extend, right to terminate this Lease, or
other right granted to it by this Lease which would otherwise be available to
it.
ARTICLE 14
Assignment And Subletting
14.1 By Tenant. The following provisions shall apply to any
assignment, subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this paragraph as "Tenant"):
A. Tenant shall not do any of the following (collectively
referred to herein as a "Transfer"), whether voluntarily, involuntarily or by
operation of laws, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld or delayed: (i) sublet all or any part of the
Premises or allow it to be sublet, occupied or used by any person or entity
other than Tenant; (ii) assign its interest in this Lease; (iii) transfer any
right appurtenant to this Lease or the Premises; (iv) mortgage or encumber the
Lease (or otherwise use the Lease
25.
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as a security device) in any manner; or (v) terminate or materially amend or
modify an assignment, sublease or other transfer that has been previously
approved by Landlord. Any Transfer so approved by Landlord shall not be
effective until Tenant has delivered to Landlord an executed counterpart of the
document evidencing the Transfer which (i) is in form approved by Landlord, (ii)
contains the same terms and conditions as stated in Tenant's notice given to
Landlord pursuant to subparagraph 14.1B, and (iii) contains the agreement of the
proposed transferee to assume all obligations of Tenant related to the Transfer
arising after the effective date of such Transfer and to remain jointly and
severally liable therefor with Tenant. Any attempted Transfer without Landlord's
consent shall be voidable at Landlord's option. Landlord's consent to any one
Transfer shall not constitute a waiver of the provisions of this paragraph 14.1
as to any subsequent Transfer nor a consent to any subsequent Transfer. No
Transfer, even with the consent of Landlord, shall relieve Tenant of its
personal and primary obligation to pay the rent and to perform all of the other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any person shall not be deemed to be a waiver by Landlord of any
provision of this Lease nor to be a consent to any Transfer.
B. Tenant shall give Landlord at least fifteen (15) days prior
written notice of any desired Transfer and of the proposed terms of such
Transfer including but not limited to (i) the name and legal composition of the
proposed transferee; (ii) a current financial statement of the transferee,
financial statements of the transferee covering the preceding three years if the
same exist, and (if available) an audited financial statement of the transferee
for a period ending not more than one year prior to the proposed effective date
of the Transfer, all of which statements are prepared in accordance with
generally accepted accounting principles; (iii) the nature of the proposed
transferee's business to be carried on in the Premises; (iv) all consideration
to be given on account of the Transfer; (v) a current financial statement of
Tenant; and (vi) such other information as may be reasonably requested by
Landlord. Tenant's notice shall not be deemed to have been served or given
until such time as Tenant has provided Landlord with all information reasonably
requested by Landlord pursuant to this subparagraph 14.1B. Tenant shall
immediately notify Landlord of any modification to the proposed terms of such
Transfer.
C. In the event that Tenant seeks to make any Transfer, then
Landlord, by giving Tenant written notice of its election within fifteen (15)
days after Tenant's notice of intent to Transfer has been deemed given to
Landlord, shall have the right to elect (i) to withhold its consent to such
Transfer, as permitted pursuant to subparagraph 14.1A, or (ii) to permit Tenant
to so assign the Lease or sublease such part of the Premises, in which event
Tenant may do so, but without being released of its liability for the
performance of all of its obligations under the Lease, and the following shall
apply:
(1) Subject to subparagraph 14.1C(5), if Tenant assigns its
interest in this Lease in accordance with this subparagraph 14.1C, then Tenant
shall pay to Landlord fifty percent (50%) of all consideration received by
Tenant over and above (i) the assignee's agreement to assume the obligations of
Tenant under this Lease and (ii) all Permitted Transfer Costs related to such
assignment.
(2) Subject to subparagraph 14.1C(5), if Tenant sublets all
or part of the Premises, then Tenant shall pay to Landlord fifty percent (50%)
of the positive difference, if any, between (i) all rent and other consideration
paid by the subtenant to Tenant, less (ii) all rent paid by Tenant to Landlord
pursuant to this Lease which is allocable to the area so sublet and all
Permitted Transfer Costs related to such sublease. Such amount shall be paid to
Landlord on the same basis, whether periodic or in lump sum, that such rent and
other consideration is paid to Tenant by its subtenant, within seven (7) days
after it is received by Tenant.
(3) Tenant's obligations under this subparagraph shall
survive any assignment or sublease. At the time Tenant makes any payment to
Landlord required by this subparagraph, Tenant shall deliver an itemized
statement of the method by which the amount to which Landlord is entitled was
calculated, certified by Tenant as true and correct. Landlord shall have the
right to inspect Tenant's books and records relating to the payments due
pursuant to this subparagraph. Upon request therefor, Tenant shall deliver to
Landlord copies of all bills, invoices or other documents upon which its
calculations are based. Landlord may condition its approval of any Transfer upon
obtaining a certification from both Tenant and the proposed transferee of all
amounts that are to be paid to Tenant in connection with such Transfer.
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(4) As used herein, the term "consideration' shall mean any
consideration of any kind received, or to be received, by Tenant as a result of
the Transfer, if such sums are related to Tenant's interest in this Lease or in
the Premises, including payments (in excess of the fair market value thereof)
for Tenant's assets, fixtures, leasehold improvements, inventory, accounts,
goodwill, equipment, furniture, general intangibles and any capital stock or
other equity ownership interest in Tenant. As used in this subparagraph, the
term "Permitted Transfer Costs" shall mean (i) all reasonable leasing
commissions paid to third parties not affiliated with Tenant in order to obtain
the Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant
with respect to the Transfer in question, (iii) the cost of tenant improvements
installed for the use of the subtenant or assignee to the extent required by
such party as a condition to the Transfer, and (iv) any payments made by Tenant
to the transferee to induce it to enter into the Transfer (e.g., payment of
moving expenses).
(5) Notwithstanding anything to the contrary contained in
the foregoing, Landlord shall not participate in excess consideration received
by Tenant from an assignee or subtenant as provided for in subparagraphs
14.1C(l) and l4.1C(2) unless such assignment or sublease occurs during an Option
Term or, in the case of a sublease, extends into an Option Term (in which latter
event Landlord shall be entitled to its share of the excess consideration paid
during the Option Term).
D. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or transfer in the
aggregate over the Lease Term of a controlling percentage of the capital stock
of Tenant, shall be deemed a voluntary assignment of Tenant's interest in this
Lease; provided, however, that the foregoing shall not apply to corporations the
capital stock of which is publicly traded. The phrase "controlling percentage"
means the ownership of and the right to vote stock possessing more than fifty
percent (50%) of the total combined voting power of all classes of Tenant's
capital stock issued, outstanding and entitled to vote for the election of
directors. If Tenant is a partnership, any withdrawal or substitution (whether
voluntary, involuntary or by operation of law, and whether occurring at one time
or over a period of time) of any partner(s) owning twenty-five percent (25%) or
more (cumulatively) of any interest in the capital or profits of the partnership
or the dissolution of the partnership, shall be deemed a voluntary assignment of
Tenant's interest in this Lease.
E. Notwithstanding anything contained in this paragraph 14.1,
so long as Tenant otherwise complies with the provisions of paragraph 14.1
Tenant may enter into any one of the following transfers (a "Permitted
Transfer") without Landlord's prior written consent, and Landlord shall not be
entitled to receive any part of any excess rentals or other consideration
resulting therefrom that would otherwise be due to it pursuant to paragraph
14.C:
(1) Tenant may sublease all or part of the Premises or
assign its interest in this Lease to any corporation which controls, is
controlled by, or is under common control with the original Tenant to this Lease
by means of an ownership interest of more than fifty percent (50%);
(2) Tenant may assign its interest in the Lease to a
corporation which results from a merger, consolidation or other reorganization
in which Tenant is not the surviving corporation, so long as (i) Tenant
demonstrates to Landlord's reasonable satisfaction that the surviving
corporation will have sufficient creditworthiness to provide adequate assurance
of future performance of all of Tenant's obligations under this Lease, or (ii)
the surviving corporation has a net worth at the time of such assignment that is
equal to or greater than the net worth of Tenant immediately prior to such
transaction; and
(3) Tenant may assign this Lease to a corporation which
purchases or otherwise acquires all or substantially all of the assets of
Tenant, so long as (i) Tenant demonstrates to Landlord's reasonable satisfaction
that the acquiring corporation will have sufficient creditworthiness to provide
adequate assurance of future performance of all of Tenant's obligations under
this Lease, or (ii) such acquiring corporation has a net worth at the time of
such assignment that is equal to or greater than the net worth of Tenant
immediately prior to such transaction.
14.2 By Landlord. Landlord and its successors in interest shall have
the right to transfer their interest in the Premises and the Property at any
time and to any person or entity. In the event of any such transfer, the
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Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, (i) shall be automatically
relieved, without any further act by any person or entity, of all liability for
the performance of the obligations of the Landlord hereunder which may accrue
after the date of such transfer, and (ii) shall be relieved of all liability for
the performance of the obligations of the Landlord hereunder which have accrued
before the date of transfer if its transferee agrees to assume and perform all
such obligations of the Landlord hereunder. After the date of any such transfer,
the term "Landlord" as used herein shall mean the transferee of such interest in
the Premises and the Property.
ARTICLE 15
General Provisions
15.1 Landlord's Right to Enter. Landlord and its agents may enter
the Premises immediately in case of emergency and otherwise only at such time as
is approved by Tenant which time of entry shall be within seven (7) days after
Landlord delivers written notice to Tenant requesting approval of a time to
enter, and Landlord may thereafter continue such entry for such reasonable
period of time as is necessary to accomplish Landlord's permitted purpose for
such entry. Landlord may so enter the Premises for the following purposes: (i)
inspecting the same; (ii) posting notices of non-responsibility, (iii) supplying
any service to be provided by Landlord to Tenant, (iv) showing the Premises to
prospective purchasers or mortgagees, (v) making necessary alterations,
additions or repairs, (vi) performing Tenant's obligations when Tenant has
failed to do so after written notice from Landlord, (vii) placing upon the
Premises ordinary "for sale" signs, (viii) responding to an emergency, and/or
(ix) during the last six (6) months of the Lease Term or at any time when there
is a Continuing Tenant Default, showing the Premises to prospective tenants and
placing upon the Premises ordinary "for lease" signs. For each of the aforesaid
purposes, Landlord may enter the Premises by means of a master key, and Landlord
shall have the right to use any and all means Landlord may deem necessary and
proper to open the doors of the Premises in an emergency. Any entry into the
Premises or portions thereof obtained by Landlord by any of said means or
otherwise shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
15.2 Surrender of the Premises. Immediately prior to the expiration
or upon the sooner termination of this Lease, Tenant shall remove all Tenant's
Trade Fixtures and other personal property, and shall vacate and surrender the
Premises to Landlord in the same condition as existed at the Commencement Date,
except for (i) reasonable wear and tear, (ii) damage caused by any peril or
condemnation, and (iii) contamination by Hazardous Materials for which Tenant is
not responsible pursuant to subparagraphs 7.2B or 7.2C. In this regard
reasonable wear and tear shall be construed to mean wear and tear caused to the
Premises by the natural aging process which occurs in spite of prudent
application of reasonable standards for maintenance, repair and janitorial
practices, and does not include items of neglected or deferred maintenance. If
Landlord so requests, Tenant shall, prior to the expiration or sooner
termination of this Lease, remove any Leasehold Improvements designated by
Landlord and repair all damage caused by such removal if such removal is
required pursuant to paragraph 5.2. If the Premises are not so surrendered at
the termination of this Lease, Tenant shall be liable to Landlord for all costs
incurred by Landlord in returning the Premises to the required condition, plus
interest on all costs incurred at the Agreed Interest Rate.
15.3 Holding Over. This Lease shall terminate without further notice
at the expiration of the Lease Term. Any holding over by Tenant after
expiration of the Lease Term shall not constitute a renewal or extension of the
Lease or give Tenant any rights in or to the Premises except as expressly
provided in this Lease. Any holding over after such expiration with the consent
of Landlord shall be construed to be a tenancy from month to month on the same
terms and conditions herein specified insofar as applicable except that Base
Monthly Rent shall be increased to an amount equal to one hundred twenty-five
percent (125%) of the Base Monthly Rent required during the last month of the
Lease Term.
15.4 Subordination. The following provisions shall govern the
relationship of this Lease to any underlying lease, mortgage or dead of trust
which now or hereafter affects the Property, and any renewal, modification,
consolidation, replacement or extension thereof (a "Security Instrument"):
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A. This Lease is subject and subordinate to all Security
Instruments existing as of the Commencement Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument.
B. At Landlord's election, this Lease shall become subject and
subordinate to any Security Instrument created after the Commencement Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed and the terms of this Lease shall not be
modified so long so Tenant in not in default and performs all of its obligations
under this Lease, unless this Lease is otherwise terminated pursuant to its
terms.
C. No subordination of this Lease to a Security Instrument
pursuant to subparagraphs 15.4A or 15.4B shall be effective until the holder of
a Security Instrument executes a subordination and non-disturbance agreement in
favor of Tenant by which the Lender agrees to be bound by the immediately
preceding sentence.
D. Tenant shall execute any document or instrument required by
Landlord or any Lender to make this Lease either prior or subordinate to a
Security Instrument, which may include such other matters as the Lender
customarily requires in connection with such agreements, including provisions
that (i) the Lender not be liable for any defaults on the part of Landlord
occurring prior to the time the Lender takes possession of the Premises in
connection with the enforcement of its Security Instrument; (ii) the Lender not
be liable for the performance of any obligations contained in the Interior
Improvement Agreement, for the completion of any improvements under construction
or required to be constructed by Landlord; (iii) recourse against the Lender is
limited to its interest in the Premises; (iv) any notices given by Tenant to
Landlord should also be delivered to the Lender; (v) Tenant shall attorn to any
purchaser at a foreclosure sale or a grantee designated in a deed in lieu of
foreclosure; (vi) the Lender shall not be bound by any rent which Tenant might
have paid in advance to any prior Landlord for a period in excess of one mouth;
(vii) the Lender shall not be bound by any agreement or modification of the
Lease made without the written consent of the Lender; and (viii) upon request,
Tenant shall enter into a new lease with Lender of the Premises upon the same
term and conditions as the Lease between Landlord and Tenant, which lease shall
cover any unexpired term of the Lease existing prior to a foreclosure, trustee's
sale, or conveyance in lieu of foreclosure. Tenant's failure to execute any
such document or instrument within ten (10) days after written demand therefor
shall constitute a default by Tenant. Tenant approves as reasonable the form of
subordination and non-disturbance agreement attached to this Lease as Exhibit
"D".
15.5 Tenant shall attorn (i) to any purchaser of the Premises or
Property at any foreclosure sale or private sale conducted pursuant to any
security instrument encumbering the Premises or the Property; (ii) to any
grantee or transferee designated in any deed given in lieu of foreclosure; or
(iii) to the lessor under any underlying ground lease should such ground lease
be terminated.
15.6 Mortgagee Protection. In the event of any default on the part
of the Landlord, Tenant will give notice by registered mail to any Lender or
lessor under any underlying ground lease whose name has been provided to Tenant
and shall offer such Lender or lessor a reasonable opportunity to cure the
default, not to exceed thirty (30) days from the expiration of the time period
granted to Landlord to cure such default; provided, however, that if such Lender
requires additional time to cure a default on the part of Landlord or to obtain
possession of the Premises by power of sale or judicial foreclosure or other
appropriate legal proceedings if obtaining possession is necessary to effect a
cure, the Lender shall be granted such opportunity, provided that the Lender
gives reasonable assurances to Tenant that such default will be cured.
15.7 Estoppel Certificates and Financial Statements. At all times
during the Lease Term, Tenant agrees, following any request by Landlord,
promptly to execute and deliver to Landlord an estoppel certificate, (i)
certifying that this Lease is unmodified and in full force and effect or, if
modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect, (ii) stating the date to
which the rent and other charges are paid in advance, if any, (iii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder or, if there are uncured defaults, specifying the
nature of such defaults and (iv) certifying such other information about the
Lease as may be reasonably required by Landlord. Tenant's failure to deliver an
estoppel certificate within ten (10) days after delivery of Landlord's request
therefor
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shall be a conclusive admission by Tenant that, as of the date of the request
for such statement, (i) this Lease is unmodified except as may be represented by
Landlord in said request and is in full force and effect, (ii) there are no
uncured defaults in Landlord's performance, and (iii) no rent has been paid in
advance. At any time during the Lease Term Tenant shall, upon ten (10) days'
prior written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the twenty-four (24) month period
prior to the date of such most recent financial statement to any existing Lender
or to any potential Lender or buyer of the Property; provided, however, that if
Tenant is a corporation whose stock is publicly traded, Tenant may satisfy the
foregoing requirement by delivering to the appropriate parties copies of its
most recent annual report prepared to satisfy requirements of the federal
securities laws. Such statements shall be prepared in accordance with generally
accepted accounting principles and, if such is the normal practice of Tenant
shall be audited by an independent certified public accountant.
15.8 Force Majeure. Any prevention, delay or stoppage due to
strikes, lockouts, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of the party obligated to
perform (except financial inability) shall excuse the performance, for a period
equal to the period of any said prevention, delay, or stoppage, of any
obligation hereunder except the obligation of Tenant to pay rent or any other
sums due hereunder.
15.9 Notices. Any notice required or desired to be given regarding
this Lease shall be in writing and may be given by personal delivery, by
facsimile telecopy, by courier service, or by mail. A notice shall be deemed to
have been given (i) on the third (3rd) business day after mailing if such notice
was deposited in the United States mail, certified or registered, postage
prepaid, addressed to the party to be served at its address first above set
forth, (ii) when delivered if given by personal delivery, and (iii) in all other
cases when actually received. Either party may change its address by giving
notice of same in accordance with this paragraph.
15.10 Obligation to Act Reasonably. Whenever the consent or approval
of a party to this Lease is required to be obtained before the other party to
this Lease may take an action, such consent or approval shall not be
unreasonably withheld or delayed.
15.11 Corporate Authority. If Tenant is a corporation (or a
partnership), each individual executing this Lease on behalf of said corporation
(or partnership) represents and warrants that he is duly authorized to execute
and deliver this Lease on behalf of said corporation in accordance with the
bylaws of said corporation (or partnership in accordance with the partnership
agreement of said partnership) and that this Lease is binding upon said
corporation (or partnership) in accordance with its terms. If Tenant is a
corporation, each of the persons executing this Lease on behalf of Tenant does
hereby covenant and warrant that Tenant is a duly authorized and existing
corporation, that Tenant is qualified to do business in California and that the
corporation has full right and authority to enter into this Lease.
15.12 Additional Definitions. Any term that is given a special
meaning by a provision in this Lease shall have such meaning when used in this
Lease or any addendum or amendment hereto. As used herein, the following terms
shall have the following meanings:
A. Agreed Interest Rate. The term "Agreed Interest Rate" shall
mean that interest rate determined as of the time it is to be applied that is
equal to the lessor of (i) two percent (2%) in excess of the "prime rate",
"reference rate", or "base rate" established by Bank of America (or if Bank of
America shall cease to exist, by the commercial bank with its headquarters in
California that has the greatest net worth among commercial banks headquartered
in California) as it may be adjusted from time to time, or (ii) the maximum
interest rate permitted by law.
B. Common Area. The term "Common Area" shall mean all areas
and facilities within the Property that are not designated by Landlord for the
exclusive use of Tenant or any other lessee or other occupant of the Property,
including the parking areas, access and perimeter roads, pedestrian sidewalk,
landscaped areas, trash enclosures, recreation areas and the like.
30.
<PAGE>
C. Law. The term "Law" shall mean any judicial decision,
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirement of any municipal, county, state, federal or other
government agency or authority having jurisdiction over the parties to this
Lease or the Premises, or both, in effect either at the Commencement Date of
this Lease or any time during the L ease Term, including, without limitation,
any regulation, order or policy of any quasi-official entity or body (e.g.,
board of fire examiners, public utilities or special district).
D. Leasehold Improvements. The term "Leasehold Improvements"
shall mean all improvements, additions, alterations and fixtures installed in
the Premises by Tenant at its expense which are not Trade Fixtures.
E. Lender. The term "Lender" shall mean any beneficiary,
mortgagee, secured party, lessor, or other holder of any Security Instrument.
F. Private Restrictions. The term "Private Restrictions" shall
mean all recorded covenants, conditions and restrictions, reciprocal easement
agreements, and any other recorded instruments affecting the use of the Premises
as they may exist from time to time.
G. Trade Fixtures. The term "Trade Fixtures" shall mean
anything affixed to the Premises by Tenant at its expense for purposes of trade,
manufacture, ornament or domestic use (except replacement of similar work or
material originally installed by Landlord) which can be removed without injury
to the Premises unless such thing has, by the manner in which it is affixed,
become an integral part of the Premises; provided, however, that all of Tenant's
signs shall be Trade Fixtures regardless of how affixed to the Premises.
15.13 Miscellaneous. Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. The captions used in this Lease are for convenience only and shall not
be considered in the construction or interpretation of any provision hereof.
Any executed copy of this Lease shall be deemed an original for all purposes.
This Lease shall, subject to the provisions regarding assignment, apply to and
bind the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. If Tenant consists of more than one person or entity, then all members
of Tenant shall be jointly and severally liable hereunder. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning, and not strictly for or against either
Landlord or Tenant. When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership or corporation or joint
venture, and the singular includes the plural. The terms "shall", "will" and
"agree" are mandatory. The term "may" is permissive. When a party is required
to do something by this Lease, it shall do so at its sole cost and expense
without right of reimbursement from the other party unless specific provision is
made therefor. Where Tenant is obligated not to perform any act, Tenant is also
obligated to use reasonable efforts to restrain any others within its control
from performing said act, including Agents, invitees, contractors, and
subcontractors. Landlord shall not become or be deemed a partner nor a joint
venturer with Tenant by reason of the provisions of this Lease.
15.14 Termination by Exercise of Right. If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate thirty (30) days after the date the right to terminate is properly
exercised (unless another date is specified in that part of the Lease creating
the right, in which event the date so specified for termination shall prevail),
the rent and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination. This paragraph does not apply to a termination of this
Lease by Landlord as a result of a default by Tenant.
31.
<PAGE>
15.15 Brokerage Commissions. Tenant warrants that is has not had any
dealings with any real estate brokers, leasing agents or salesmen, or incurred
any obligations for the payment of real estate brokerage commissions or finder's
fees which would be earned or due and payable by reason of the execution of this
Lease other than to the Retained Real Estate Brokers. Landlord shall be
responsible for the payment of any commission owed pursuant to a separate
written commission agreement between Landlord and the Retained Real Estate
Brokers for the payment of the commission as a result of the execution of this
Lease.
15.16 Entire Agreement. This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that
neither Landlord nor Landlord's agent(s) has made any representation or warranty
as to (i) whether the Premises may be used for Tenant's intended use under
existing Law or (ii) the suitability of the Premises or the Common Area for the
conduct of Tenant's business or the condition of any improvements located
thereon. Tenant expressly waives all claims for damage by reason of any
statement, representation, warranty, promise or other agreement of Landlord or
Landlord's agent(a), if any, not contained in this Lease or in any addendum or
amendment hereto. No subsequent change or addition to this Lease shall be
binding unless in writing and signed by the parties hereto.
15.17 Old Lease; Assumption. In consideration for Landlord's
agreement to enter into this Lease with Tenant in substantially the same form as
the Original Lease, Tenant hereby assumes FMC's obligations under the Original
Lease, including, without limitation, the obligation to restore the Premises
pursuant Section 5.6 of the Original Lease.
32.
<PAGE>
In Witness Whereof, Landlord and Tenant have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Commencement
Date of this Lease.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
ATP Associates, L.P., a Delaware limited partnership United Defense L.P.,
a Delaware limited partnership
By: Menlo Equities Associates III Inc., a Delaware By: UDLP Holdings Corp., a Delaware corporation, its
corporation, Its General Partner General Partner
By: /s/ Henry D. Bullock By: /s/ Peter C. Woglom
------------------------------------- ----------------------------------------------
Its: President Printed
------------------------------------ Name: Peter C. Woglom
--------------------------------------------
Title: Vice-President and General Manager, Ground
-------------------------------------------
Systems Division-UDLP
--------------------------------------------------
</TABLE>
33.
<PAGE>
Exhibit "A"
1.
<PAGE>
Exhibit "B"
PLANS AND SPECIFICATIONS
FOR BUILDING "C"
[Intentionally Deleted]
1.
<PAGE>
Exhibit C
INTERIOR IMPROVEMENT AGREEMENT
(Building C)
This Interior Improvement Agreement is made part of that Lease dated for
reference purposes only April __, 1999 (the "Lease"), by and between ATP
Associates L.P., a Delaware limited partnership ("Landlord") and United Defense
L.P., a Delaware limited partnership ("Tenant") of approximately 86,785 square
feet of gross leaseable area located in that building commonly known as Building
C of Airport Technology Park, 2830 De La Cruz Boulevard, Santa Clara,
California.
Landlord and Tenant agree that the following terms are hereby added to the
Lease:
1. Definitions. As used herein and in the Lease, the following terms
shall have the following meanings:
A. Approved Plans. The term "Approved Plans" shall mean those final
plans, specifications and working drawings to be approved by Landlord.
B. Interior Improvements. The term "Interior Improvements" shall
mean those improvements described by the Approved Plans that Tenant has the
right to construct in the Premises pursuant to paragraph 2 hereof.
C. Interior Improvement Costs. The term "Interior Improvement
Costs" shall mean the following: (i) the total amount due pursuant to the
construction contract entered into by Tenant pursuant to subparagraph 2B hereof
to construct the Interior Improvements; (ii) the cost of all governmental
approvals, permits and fees required as a condition to the construction of the
Interior Improvements; (iii) all utility connection or use fees; (iv) fees of
architects, designers, or engineers for services rendered in connection with the
design and construction of the Interior Improvements; (v) Tenant's moving and
relocation costs incurred in connection with the consolidation of its employees
at the Premises over the twelve (12) months prior to the date hereof ("Tenant's
Relocation Costs") and (vi) the cost of payment and performance bonds obtained
to assure completion of the Interior Improvements. There shall be excluded from
Interior Improvement Costs the following, to the extent not included in the
construction contract with the Prime Contractor referred to in subparagraph 2B
hereof: (i) any fee for Landlord's review of Tenant's plans for the Interior
Improvements; (ii) temporary electricity used during the construction period in
connection with the construction of the Interior Improvements; and (iii) any
fees charged by Tenant or its agents or employees for supervising/reviewing the
construction of the Interior Improvements (excluding overhead and profits of
prime contractor).
D. Landlord's Interior improvement Allowance. The term "Landlord's
Interior Improvement Allowance" shall mean the maximum amount Landlord is
required to spend toward the payment of the Interior Improvement Costs, which
amount is equal to One Hundred Ninety Thousand Dollars ($190,000).
E. Substantially Completed. The Interior Improvements shall be
deemed to be "Substantially Completed" when (i) Prime Contractor has issued its
written certificate stating that such improvements have been substantially
completed in accordance with the Approved Plans therefor, (ii) electrified
office partitions are installed, and (iii) the Building Department of the City
of Santa Clara has completed its final inspection of such improvements and has
"signed off" the building inspection card approving such work as complete.
F. Prime Contractor. The term "Prime Contractor" shall mean
________.
2. Construction Of Interior improvements. Tenant shall have the right to
construct the Interior Improvements in accordance with the following:
1.
<PAGE>
A. Tenant warrants that the Interior Improvements shall be
constructed in a good and workmanlike manner substantially in accordance with
the Approved Plans (as modified by any change orders approved by Landlord and
Tenant pursuant to paragraph 3 hereof) and all Laws. All materials and
equipment furnished shall be fully paid for and be free of liens, chattel
mortgages, and security interests of any kind.
B. The Interior Improvements shall be constructed by Prime
Contractor pursuant to a construction contract between Tenant and Prime
Contractor. Landlord shall have the right to review such form of construction
contract before it is executed. Once the construction contract between Prime
Contractor and Tenant has been executed, Tenant shall not materially amend,
modify or alter the responsibilities of Prime Contractor thereunder without
Landlord's written consent, except for change orders approved pursuant to
paragraph 3 hereof. In connection with the execution of such construction
contract, Tenant shall use reasonable efforts to provide that all construction
or equipment warranties or guarantees obtained by Tenant shall, to the extent
obtainable, provide that such warranties and guaranties shall also run for the
benefit of Landlord. Upon reasonable written advance request of Landlord,
Tenant shall inform Landlord of all written construction and equipment
warranties existing in favor of Tenant which affect the Interior Improvements.
Tenant shall cooperate with Landlord in enforcing such warranties and in
bringing any suit that may be necessary to enforce liability with regard to any
defects.
C. Tenant shall use reasonable efforts to commence construction of
the Interior Improvements as soon as reasonably practicable, and shall
thereafter continuously prosecute such construction to completion.
D. Tenant shall properly obtain, comply with and keep in effect all
permits, licenses and other governmental approvals which are required to be
obtained from governmental bodies in order to construct the Interior
Improvements. Upon reasonable written advance request, Tenant shall promptly
deliver copies of all such permits, licenses and approvals to Landlord.
E. Tenant shall be solely responsible for all aspects of the
construction of the Interior Improvements, including the development and design
thereof as set forth in the Approved Plans, the supervision of the work of
construction, the qualification, financial condition, and performance of all
architects, engineers, contractors, material suppliers, consultants, and the
accuracy of all applications for payment and the proper application of all
disbursement. Landlord is not obligated to supervise, inspect or inform Tenant
or any third party of any aspect of the construction of the Interior
Improvements. Any inspection or review by Landlord, is to determine whether
Tenant is properly discharging its obligations to Landlord and may not be relied
upon by Tenant or any third party. Landlord owes no duty of care to Tenant or
any third party to protect against or to inform Tenant or any third party of,
any negligence, faulty, inadequate or defective design or construction of the
Interior Improvements.
3. Chances to Approved Plans for Interior Improvements. Neither Landlord
nor Tenant shall have the right to order extra work or change orders with
respect to the Approved Plans or the construction of the Interior Improvements
without the prior written consent of the other. All extra work or change orders
requested by either Landlord or Tenant shall be made in writing, shall specify
the amount of delay or the time saved resulting therefrom, shall specify any
added or reduced cost resulting therefrom, and shall become effective and a part
of the Approved Plans once approved in writing by both parties. Notwithstanding
the foregoing, Tenant's failure to obtain Landlord's consent to an extra work or
change order shall not be an Event of Tenant's Default if Landlord would have
been required to consent to the change pursuant to the terms hereof.
4. Payment of Interior Improvement Costs. The Interior Improvement Costs
shall be paid as follows:
A. Landlord shall contribute to the payment of all Interior
Improvement Costs up to an amount equal to Landlord's Interior Improvement
Allowance. An amount equal to 40% of the Landlord's Interior Improvement
Allowance shall be applied to Tenant's Relocation Costs (the "Tenant Relocation
Allowance"). If, at the time of completion of all Interior Improvements, (1)
Tenant has not used the entire Tenant Relocation Allowance, Tenant shall receive
the remainder of the Tenant Relocation Allowance as a credit against Base
Monthly Rent for the first month of the Lease Term, or at Tenant's Option,
Tenant can use such amount for the Interior Improvement Costs at Building A and
(2) Tenant has not used the entire Landlord's Interior Improvement
2.
<PAGE>
Allowance (other than the amount allocated to the Tenant Relocation Allowance),
Tenant can use such amount for the Interior Improvement Costs at Building A.
Except as expressly provided in the preceding sentence,, if any part of the
Landlord's Interior Improvement Allowance is not used by Tenant, or Tenant does
not qualify for a disbursement pursuant to the provisions of this paragraph 4
with the result that the entire allowance is not disbursed, there shall
nonetheless be no adjustment in the Base Monthly Rent due from Tenant pursuant
to the Lease. If the Interior Improvement Costs exceed the maximum amount of
Landlord's required contribution, then Tenant shall pay the entire amount of
such excess.
B. Landlord and Tenant acknowledge that the construction contract
Tenant will enter into for the construction of the interior Improvements will
provide for progress payments to Prime Contractor in stages as the work is
completed. Landlord shall pay the full amount of each such progress payment
until all of Landlord's Interior Improvement Allowance is expanded. Thereafter,
if the cost of the Interior Improvements exceeds the amount of Landlord's
required contribution for such improvements, then Tenant shall pay the rest of
the progress payments due to Prime Contractor. Landlord shall pay any progress
payment due from Landlord to Prime Contractor within thirty (30) days after
satisfaction of all of the conditions precedent to such progress payment by
Landlord that has been requested by Tenant which are set forth in subparagraph
4D and 4E hereof. If Landlord fails to pay any such amount when due, then
Tenant may (but without the obligation to do so) advance such funds on
Landlord's behalf, and Landlord shall be obligated to reimburse Tenant for the
amount of funds so advanced on its behalf and all costs incurred by Tenant in so
doing, including all interest at the Agreed Interest Rate.
C. If Tenant desires to obtain a disbursement from Landlord from the
Landlord's Interior Improvement Allowance for the purpose of paying Interior
Improvement Costs, Tenant shall submit to Landlord a written itemized statement,
signed by Tenant (an "Application for Payment") setting forth the following:
(i) a description of the construction work performed, materials supplied, and/or
costs incurred or due for which disbursement is requested; and (ii) the total
amount incurred, expended and/or due for each requested item less prior
disbursements; and (iii) the amount due to be paid by Landlord from Landlord's
Interior Improvement Allowance.
D. Landlord shall have no obligation to make any disbursement from
Landlord's Interior Improvement Allowance at any time that there is a Continuing
Tenant Default (as defined in paragraph 1.14 of the Lease), or there has
occurred an event, omission or failure of conditions which would constitute an
Event of Tenant's Default (as defined in paragraph 13.1 of the Lease) after
notice or lapse of time, or both. In addition, Landlord shall have the right to
condition any disbursement from Landlord's Interior Improvement Allowance upon
Landlord's receipt and approval of the following with respect to each
Application for Payment:
(1) The form of Application for Payment and the sufficiency of
the information contained therein;
(2) Bills and invoices and any other documents evidencing the
total amount expended, incurred, or due for any requested contribution to
Interior Improvement Costs;
(3) Evidence of Tenant's use of lien releases acceptable to
Landlord for payments or disbursements to any contractor, subcontractor,
materialmen, supplier, or lien claimant;
(4) Architects, inspectors and/or engineer's periodic
certification and the stage of construction that has been completed and its
conformance to the Approved Plans based upon any such architects, inspectors
and/or engineers periodic, physical inspections of the Premises and Interior
Improvements;
(5) Waivers and releases of mechanics' lien, stop notice claim,
equitable lien claim or other lien claim rights or lien bonds in form and amount
reasonably satisfactory to Landlord;
(6) Evidence of Tenant's compliance with its obligations pursuant
to paragraph 2 hereof;
(7) Any other document, requirement, evidence or information that
Landlord may reasonably request pursuant to any provision of this Interior
Improvement Agreement.
3.
<PAGE>
E. Tenant agrees that all disbursements made to Tenant by Landlord
from Landlord's Interior Improvement Allowance shall be used only for the
payment of Interior Improvement Costs and shall be applied as set forth, and for
the purposes described in, the relevant Application for Payment based upon which
the disbursement is made.
5. Punchlist. Within a reasonable period of time after the Interior
Improvements are Substantially Completed, Landlord, Tenant and Tenant's
architect shall together walk through and inspect such improvements so
completed, using reasonable efforts to discover all uncompleted or defective
construction. After such inspection has been completed. Tenant shall use
reasonable efforts to complete and/or repair all "punch list" items within
thirty (30) days thereafter.
6. Construction Warranty for the Interior Improvements. Tenant warrants
that the construction of the Interior Improvements will be performed in
accordance with the Approved Plans therefor and all Laws in a good and
workmanlike manner, and that all materials and equipment furnished will conform
to said plans and shall be new and otherwise of good quality. Tenant shall
promptly commence the cure of any breach of such warranty and complete such cure
with diligence at Tenant's cost and expense.
7. Ownership of the Interior Improvements. All of the Interior
Improvements which are constructed with funds of Landlord shall become the
property of Landlord upon installation and shall not be removed or altered by
Tenant. Any part of the Interior Improvements which are constructed by Landlord
with funds of Tenant shall become the property of Tenant upon installation and
Tenant shall have the right to depreciate and claim and collect investment tax
credits in such improvements; provided, however, that (i) Tenant shall not
remove or alter such improvements during the term of the Lease; (ii) such
improvements shall be surrendered to Landlord, and title to such improvements
shall vest in Landlord, at the expiration or earlier termination of the Lease
Term; and (iii) in no event shall Landlord have any obligation to pay Tenant for
the cost or value of such improvements. Notwithstanding the foregoing, Tenant
shall have the right to remove only the following kinds of Interior Improvements
so long as it repairs all damage caused by the installation thereof and returns
the Premises to the condition existing prior to the installation of such
Interior Improvements: (i) built-in cabinets, file drawers and bookcases; (ii)
computer room air conditioning; (iii) canteen equipment; (iv) office cubicle
systems; and (v) ornamental statues. If both Landlord and Tenant contribute to
the cost of constructing the Interior Improvements, Landlord and Tenant shall
agree in writing which of such improvements are to be constructed using
Landlord's funds (and therefore are Landlord's property) and which of them are
to be installed with Tenant's funds (and therefore are Tenant's property during
the Lease Term).
8. Documents. Within fifteen (15) days after receiving a written request
from Landlord, Tenant shall deliver to Landlord the most current version of the
following: (i) a complete and correct list showing the name, address and
telephone number of each contractor, subcontractor and principal materials
supplier engaged in connection with the construction of the Interior
Improvements, and the total dollar amount of each contract and subcontract
(including any changes) together with the amounts paid through the date of the
list; (ii) true and correct copies of all executed contracts and subcontracts
identified in the list described in the immediately preceding clause, including
any changes; (iii) a construction progress schedule; and (iv) any update to any
item described in the preceding clauses which Tenant may have previously
delivered to Landlord. Tenant expressly authorizes Landlord to contact any
contractor, subcontractor or materials supplier to verify any information
disclosed in accordance with this paragraph. Within sixty (60) days after the
Interior Improvements have been Substantially Completed, Tenant shall cause the
following to be delivered to Landlord:
A. Statements from Tenant's architect in form reasonably
satisfactory to Landlord certifying that the Interior Improvements have been
completed substantially in accordance with the Approved Plans and all Laws;
B. A copy of all permanent certificates of occupancy and other
governmental approvals which may be received by Tenant with respect to the
construction of the Interior Improvements.
C. One (1) copy of the Approved Plans, one (1) copy of each extra
work or change order, and one (1) copy of any "As-Built" plans and
specifications for the Interior Improvements, which Tenant may have elected to
cause to be prepared;
4.
<PAGE>
D. One (1) copy of all warranties, guaranties, and operational
manuals relating to the Interior Improvements;
E. A copy of a recorded notice of completion relating to the
construction of the Interior Improvements.
9. Indemnity. Tenant agrees to indemnify and hold Landlord harmless from
and against all liabilities, claims, actions, damages, costs and expenses
(including attorneys' fees incurred by Landlord in protecting its interest from
the following) arising out of or resulting from construction of the Interior
Improvements, including any mechanics' liens, defective workmanship or materials
and any claim or cause of action of any kind by any party that Landlord is
liable for any act or omission committed or made by Tenant, its agents,
employees, or contractors in connection with the construction of the Interior
Improvements.
10. Effect of Agreement. In the event of any inconsistency between this
Agreement and the Lease, the terms of this Agreement shall prevail.
<TABLE>
<CAPTION>
AS TENANT: AS LANDLORD:
<S> <C>
United Defense L.P., ATP Associates, L.P., a Delaware limited partnership
a Delaware limited partnership
By: UDLP Holdings Corp., a Delaware corporation, its By: Menlo Equities Associates III Inc., a Delaware
General Partner corporation, Its General Partner
By: /s/ Peter C. Woglom By: /s/ Henry D. Bullock
--------------------------------------------- --------------------------------------
Printed Its: President
Name: Peter C. Woglom -------------------------------------
-------------------------------------------
Title: Vice-President and General Manager, Ground
------------------------------------------
Systems Division UDLP
- -------------------------------------------------
</TABLE>
5.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 DEFINITIONS............................................... 1
1.1 Commencement Date.......................................... 1
1.2 Rent Start Date............................................ 1
1.3 Lease Term................................................. 1
1.4 Property................................................... 1
1.5 Premises................................................... 1
1.6 Permitted Use.............................................. 1
1.7 Tenant's Minimum Liability Insurance Coverage.............. 2
1.8 Tenant's Allocated Parking Stalls.......................... 2
1.9 Retained Real Estate Brokers............................... 2
1.10 Address for Notices........................................ 2
1.11 Lease...................................................... 2
1.12 Building A Lease........................................... 2
1.13 Tenant's Allocated Share................................... 2
1.14 Continuing Tenant Default.................................. 2
1.15 Additional Definitions..................................... 2
ARTICLE 2 DEMISE AND ACCEPTANCE..................................... 3
2.1 Demise of Premises......................................... 3
2.2 Delivery and Acceptance of Possession...................... 3
2.3 Construction of Interior Improvements...................... 3
2.4 Options to Extend Lease Term............................... 3
ARTICLE 3 RENT...................................................... 6
3.1 Base Monthly Rent.......................................... 6
3.2 Additional Rent............................................ 6
3.4 Late Charge and Interest on Rent in Default................ 7
ARTICLE 4 USE OF PREMISES........................................... 7
4.1 Limitation on Type......................................... 7
4.2 Compliance with Laws and Private Restrictions.............. 8
4.3 Insurance Requirements..................................... 8
4.4 Outside Areas.............................................. 9
4.5 Signs...................................................... 9
4.6 Rules and Regulations...................................... 9
4.7 Parking.................................................... 9
4.8 Window Coverings........................................... 10
</TABLE>
i.
<PAGE>
Table of Contents
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
4.9 Outside Sales.............................................. 10
ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS................. 11
5.1 Trade Fixtures............................................. 11
5.2 Leasehold Improvements..................................... 11
5.3 Alterations Required by Law................................ 12
5.4 Landlord's Improvements.................................... 12
5.5 Liens...................................................... 13
ARTICLE 6 REPAIR AND MAINTENANCE.................................... 14
6.1 Tenant's Obligation to Maintain............................ 14
6.2 Landlord's Obligation to Maintain.......................... 14
6.3 Tenant's Obligation to Reimburse........................... 15
6.4 Common Operating Expenses Defined.......................... 16
6.5 Control of Common Area..................................... 17
6.6 Tenant's Negligence........................................ 17
ARTICLE 7 WASTE DISPOSAL AND UTILITIES.............................. 18
7.1 Waste Disposal............................................. 18
7.2 Hazardous Materials........................................ 18
7.3 Utilities.................................................. 20
7.4 Compliance with Governmental Regulations................... 21
ARTICLE 8 REAL PROPERTY TAXES....................................... 21
8.1 Real Property Taxes Defined................................ 21
8.2 Tenant's Obligation to Reimburse........................... 22
8.3 Taxes on Tenant's Property................................. 22
ARTICLE 9 INSURANCE................................................. 22
9.1 Tenant's Insurance......................................... 22
9.2 Landlord's Insurance....................................... 24
9.3 Tenant's Obligation to Reimburse........................... 24
9.4 Release and Waiver of Subrogation.......................... 24
ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY.......... 25
10.1 Limitation on Landlord's Liability......................... 25
10.2 Limitation on Tenant's Recourse............................ 26
10.3 Indemnification of Landlord................................ 26
ARTICLE 11 DAMAGE TO PREMISES........................................ 26
11.1 Landlord's Duty to Restore................................. 26
</TABLE>
ii.
<PAGE>
Table of Contents
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
11.2 Landlord's Right to Terminate.............................. 27
11.3 Tenant's Right to Terminate................................ 28
11.4 Abatement of Rent.......................................... 28
ARTICLE 12 CONDEMNATION.............................................. 28
12.1 Tenant's Termination Right................................. 28
12.2 Restoration and Abatement of Rent.......................... 29
12.3 Temporary Taking........................................... 29
12.4 Division of Condemnation Award............................. 29
ARTICLE 13 DEFAULT AND REMEDIES...................................... 30
13.1 Events of Tenant's Default................................. 30
13.2 Landlord's Remedies........................................ 31
13.3 Waiver by Tenant of Certain Remedies....................... 32
13.4 Waiver..................................................... 33
13.5 Limitation on Exercise of Rights........................... 33
ARTICLE 14 ASSIGNMENT AND SUBLETTING................................. 33
14.1 By Tenant.................................................. 33
14.2 By Landlord................................................ 36
ARTICLE 15 GENERAL PROVISIONS........................................ 36
15.1 Landlord's Right to Enter.................................. 36
15.2 Surrender of the Premises.................................. 37
15.3 Holding Over............................................... 37
15.4 Subordination.............................................. 37
15.6 Mortgagee Protection....................................... 38
15.7 Estoppel Certificates and Financial Statements............. 38
15.8 Force Majeure.............................................. 39
15.9 Notices.................................................... 39
15.10 Obligation to Act Reasonably............................... 39
15.11 Corporate Authority........................................ 39
15.12 Additional Definitions..................................... 39
15.13 Miscellaneous.............................................. 40
15.14 Termination by Exercise of Right........................... 41
15.15 Brokerage Commissions...................................... 41
15.16 Entire Agreement........................................... 41
15.17 Old Lease; Assumption...................................... 41
</TABLE>
iii.
<PAGE>
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this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
1.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF UNITED DEFENSE INDUSTRIES, INC.
UDLP HOLDINGS CORP., a Delaware corporation
UNITED DEFENSE, L. P., a Delaware limited partnership
Its Subsidiaries:
UDLP International, Inc., a Delaware corporation
UD United Defense International Sales Corp., a Barbados corporation
UDLP Overseas Limited, a Delaware corporation
UDLP Components, Limited, a Bermuda corporation
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-60207) pertaining to the UDLP Amended and Restated Supplemental
Retirement and Savings Plan, the United Defense Stock Option Plan, and the
United Defense Industries, Inc. Employee Equity Purchase Plan of our report
dated January 31, 2000, with respect to the consolidated financial statements of
United Defense Industries, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ Ernst & Young LLP
Washington D.C.
February 28, 2000
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<NAME> UDI
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<CURRENT-LIABILITIES> 482,130
<BONDS> 200,000
0
0
<COMMON> 0
<OTHER-SE> 24,361
<TOTAL-LIABILITY-AND-EQUITY> 873,998
<SALES> 1,213,526
<TOTAL-REVENUES> 1,213,526
<CGS> 991,907
<TOTAL-COSTS> 1,172,566
<OTHER-EXPENSES> (1,820)
<LOSS-PROVISION> 0
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<ARTICLE> 5
<CIK> 0001052971
<NAME> IHLLC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
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<EPS-BASIC> 0
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</TABLE>
